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Telecom Sector-9 Jan 2012

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					                             Institutional Equities




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                                                                                                                Institutional Equities


                                           Telecom Sector
                                                                                                                             9 January 2012


                       Defensive No More                                                                                       View: Negative
                       We initiate coverage on the Indian telecom sector with Sell ratings on Bharti
                       Airtel and Idea Cellular and a Hold rating on Reliance Communications (RCOM).
                       Bharti and Idea have outperformed the Sensex over the past one year, partly on
Initiating Coverage




                                                                                                                               Harit Shah
                       optimism generated by tariff hikes. However, in our view, current stock prices do                       harit.shah@nirmalbang.com
                       not adequately factor in high leverage, regulatory risk, slowing subscriber                             +91-22-3926 8068
                       addition and low returns on capital. Thus, we see little scope for upside going
                       forward. It should be noted that our FY13 EPS estimates are below consensus
                       estimates for Bharti, Idea and RCOM by 17.7%, 11.9% and 12.3%, respectively.
                       Stocks outperform due to tariff hikes; leverage, regulatory risks not factored in:
                       Bharti Airtel and Idea Cellular have outperformed the BSE Sensex by 15% and 39%,
                       respectively, over the past one year, as the perception is these stocks are defensive
                       bets and optimism generated by tariff hikes enabled them to remain resilient amid
                       turbulent market conditions. We believe tariff hikes are unlikely to sustain given the
                       Telecommunications Regulatory Authority of India’s (TRAI) aversion to such steps by
                       operators, apart from the likelihood that even in the event of consolidation the market
                       will still be fairly competitive, thereby preventing any structural upside in tariff. Apart
                       from this, we believe a significant rise in financial leverage, intangibles and
                       regulatory risks including ‘excess spectrum’ charges and licence renewal risks
                       have not been adequately factored in current share prices. Regulatory risks
                       account for 11-35% of the current market capitalisation for Bharti and Idea.
                       Slowdown in subscriber addition reflects rising saturation: Over the past few
                       months, the industry’s net subscriber addition fell significantly, from over 20mn
                       in March 2011 to just 7.8mn in October 2011, as per TRAI data. This, we believe,
                       is a clear sign that the Indian telecom market is nearing saturation point and
                       going forward, net subscriber addition will continue to taper down steadily.
                       Therefore, companies need to drive revenue growth through new services like 3G.
                       However, in our view, 3G is likely to take time to ramp up and attempting to sustain
                       revenue growth through tariff hikes is unlikely to be an easy task either.
                       Returns on capital employed at a multi-year low: Due to significant fund
                       requirements of telecom companies in FY11 owing to spectrum auctions and poor
                       financial performance because of price wars, return on equity (RoE) and return on
                       capital employed (RoCE) declined to multi-year lows. Going forward, we do not expect
                       a significant improvement in performance on this front. In fact, we expect Idea and
                       RCOM to register single-digit RoE and RoCE even in FY13, not even equal to
                       their cost of capital.
                       We assign Sell ratings to Bharti and Idea, Hold to RCOM: We assign Sell ratings to
                       Bharti and Idea, while we have a Hold rating on RCOM. Rise in financial leverage,
                       regulatory risks, multi-year low returns on capital and slowing subscriber growth are
                       common threads connecting all these companies and we believe this is not adequately
                       factored into current stock prices. Faster-than-expected monetisation of tower assets,
                       which would enable deleveraging and thus improved financial metrics and valuations,
                       are key upside risks to our negative view on the sector. It should be noted that our
                       FY13 EPS estimates are below consensus estimates for Bharti, Idea and RCOM
                       by 17.7%, 11.9% and 12.3%, respectively.
                                                 Market cap       CMP Target      Up/                    EPS (Rs)                    P/E (x)           RoE (%)
                      Company         Rating    Rsbn US$ bn       (Rs) Price down (%)            FY11      FY12E FY13E         FY11 FY12E FY13E FY11 FY12E FY13E
                      Bharti Airtel      Sell   1,255     23.8     331   300       (9)            15.9       14.7  21.1         20.7   22.5  15.6 13.3    10.9  14.1
                      Idea Cellular      Sell      272     5.1      82    75       (9)             2.7        2.4   3.7         30.2   34.9  22.0  7.6      6.1  9.0
                      RCOM              Hold      160      3.0      78    86       11              6.2        4.4   5.7         12.4   17.6  13.5  3.2      2.3  3.0
                      Source: Company, Nirmal Bang Institutional Equities Research

                                                                    Please refer to the disclaimer towards the end of the document.
                                                         Institutional Equities
    Table of Contents


    Stocks outperform on defensive perception of sector, further tariff hike expectations………………05

    Financial leverage, intangibles rise sharply post 3G, BWA auctions ………………..………….........05

    Consensus estimates optimistic on FY13 margins, EPS; we are below consensus by 12-8%…....09

    Tariff hikes likely reason for optimism on consensus margin; too early to turn positive…………….10

    Regulatory risks remain – NTP 2011 more a directional perspective………………………………...11

    TRAI recommendations on spectrum management and licensing framework – Nothing definite.…12

    Slowdown in net subscriber addition – Reflects rising saturation in domestic market………..….….15

    RoE, RoCE at multi-year lows……………………………………………………………………..………15

    Financials – Expect FY13 performance to improve after a difficult FY12……………….…………....16



    Companies


    Bharti Airtel…………………………………………………………………………………….…..……..….21

    Idea Cellular………………………………………………………………………………………...…..….. 37

    Reliance Communications………………………………………………………………….………..........47




4                                                                                 Telecom Sector
                                                                            Institutional Equities
    Stocks outperform on defensive perception of sector, further tariff hike expectations
    Bharti Airtel and Idea Cellular handsomely outperformed BSE Sensex over the past one year, with
    Bharti beating the benchmark index by 15% and Idea by 39%. We believe the street’s perception of
    telecom as a defensive sector has enabled these stocks to remain resilient amid turbulent market
    conditions. The tariff hikes effected by telecom companies in July 2011 also boosted the sentiment
    for the sector, driving expectations of further tariff hikes going forward along with the attendant
    benefits on the margin profile. We do not concur with the defensive bet argument owing to the
    following factors: (1) Significant increase in financial leverage on account of debt availed for
    third generation (3G) and broadband wireless access (BWA) spectrum licences, (2) Significant
    increase in goodwill and intangibles for Bharti owing to spectrum licences and Zain
    acquisition, (3) Ever-present regulatory risks including ‘excess spectrum’ charges and licence
    renewal risks, which account for 11-35% of the current market prices of Bharti and Idea, (4)
    Sustained slowdown in incremental subscriber addition, which is likely to lead to slowdown in
    revenue growth, and (5) Low returns on equity (RoE) and capital employed (RoCE), in some
    cases even below the average cost of capital. We elaborate on these points below as also our
    view on tariff hikes.
    Exhibit 1: Telecom stocks vs Sensex – Bharti, Idea outperform
                           (Based to 100)
                        150

                        128

                        106

                           84

                           62

                           40
                             Jan-11             Mar-11     Jun-11          Aug-11         Oct-11       Jan-12
                                      Bharti Airtel      Idea Cellular         RCOM            BSE Sensex

    Source: C-line

    Financial leverage, intangibles rise sharply post 3G, BWA auctions
    The Indian telecom sector has been characterised by lack of policy clarity, arbitrary decision-making, tussles
    between telecom operators, Department of Telecommunications (DoT) and sector regulator TRAI, and a
    continuous battle over scarce resources, namely spectrum. The government has not allocated fresh second
    generation (2G) technology spectrum since several years and Indian mobile operators hold the lowest
    quantum of spectrum in the world. To cite an example, Bharti, on an average, holds 7.7 megahertz (MHz) of
    spectrum, while Idea holds 6MHz. In comparison, US operator AT&T holds more than 70MHz of spectrum. A
    lower quantity of spectrum to address high density business centres like Mumbai and Delhi subsequently
    implies that to improve coverage and maintain the quality of service (QoS), mobile operators have to increase
    capital expenditure for setting up a higher number of towers and base transceiver stations (BTS).
    Exhibit 2: 2G spectrum holdings of Bharti Airtel, Idea Cellular
    Telecom circle (MHz)                                                 Bharti Airtel                            Idea Cellular
    Delhi                                                                        10.0                                       8.0
    Mumbai                                                                        9.2                                       4.4
    Kolkata                                                                         8.0                                     4.4
    Maharashtra                                                                     8.2                                     9.8
    Gujarat                                                                       6.2                                       6.2
    Andhra Pradesh                                                               10.0                                       8.0
    Karnataka                                                                    10.0                                       6.2
    Tamil Nadu (including Chennai)                                                9.2                                       4.4
    Kerala                                                                          6.2                                     8.0


5                                                                                                           Telecom Sector
                                                                                                         Institutional Equities
                                Telecom circle (MHz)                                                  Bharti Airtel                           Idea Cellular
                                Punjab                                                                         7.8                                      7.8
                                Haryana                                                                        6.2                                      6.2
                                Uttar Pradesh (West)                                                           6.2                                      8.0
                                Uttar Pradesh (East)                                                           7.2                                      6.2
                                Rajasthan                                                                      8.2                                      6.2
                                Madhya Pradesh                                                                 8.0                                      8.0
                                West Bengal                                                                    6.2                                      4.4
                                Himachal Pradesh                                                               6.2                                      4.4
                                Bihar                                                                          9.2                                      4.4
                                Orissa                                                                         8.0                                      4.4
                                Assam                                                                          6.2                                      4.4
                                North East                                                                     6.2                                      4.4
                                Jammu & Kashmir                                                                6.2                                      4.4
                                Total spectrum                                                               168.8                                   132.6
                                Average spectrum                                                               7.7                                      6.0
                               Source: TRAI

                               Given this scenario, spectrum is a highly valuable resource for all mobile operators, particularly considering
                               the expected increase in data usage in Indian market. It should be noted that data revenues for Bharti account
                               for 14.5% of its domestic mobile service revenues as compared with 26.6% for the Vodafone Group (both for
                               2QFY12), 32.2% for China Mobile (1HCY11), 35% for Celcom (3QCY11, Malaysian arm of Axiata Group) and
                               40% for XL (3QCY11, Indonesian arm of Axiata Group). Consequently, when the government finally
                               conducted the much-awaited 3G spectrum auction in May 2010 after a long delay, a bidding war ensued with
                               operators jacking up prices as high as 10x the reserve price set by the government for key circles like Mumbai
                               and Delhi. Given the importance of gaining access to scarce spectrum, operators bid irrationally for 5MHz
                               of 3G spectrum, with the government being the key beneficiary earning Rs677.2bn from the auction as
                               compared with Rs143.3bn based on the respective circle-wise reserve prices, a significant 373%
                               premium.
Exhibit 3: 3G spectrum auction circle-wise winning prices, winners
Circle                   Winning bidders                    Reserve price (Rsmn)       Winning price (Rsmn)           Premium (%)   Govt. revenues (Rsmn)*
Delhi                    Bharti, Vodafone, RCOM                              3,200                       33,169             936.5                  132,677
Mumbai                   Bharti, Vodafone, RCOM                              3,200                       32,471             914.7                  129,883
Maharashtra              Vodafone, TTSL, Idea                                3,200                       12,578             293.1                   50,313
Gujarat                  Vodafone, TTSL, Idea                                3,200                       10,761             236.3                   43,042
Andhra Pradesh           Bharti, Idea, Aircel                                3,200                       13,731             329.1                   54,926
Karnataka                Bharti, TTSL, Aircel                                3,200                       15,799             393.7                   63,196
Tamil Nadu               Bharti, Vodafone, Aircel                            3,200                       14,649             357.8                   58,598
Kolkata                  Vodafone, RCOM, Aircel                              1,200                        5,443             353.6                   21,770
Kerala                   Idea, TTSL, Aircel                                  1,200                        3,125             160.4                   12,499
Punjab                   RCOM, Idea, TTSL, Aircel                            1,200                        3,220             168.3                   16,101
Haryana                  Vodafone, Idea Cellular, TTSL                       1,200                        2,226              85.5                    8,903
Uttar Pradesh (East)     Vodafone, Idea, Aircel                              1,200                        3,646             203.8                   14,583
Uttar Pradesh (West)     Bharti, Idea, TTSL                                  1,200                        5,140             328.4                   20,562
Rajasthan                Bharti, RCOM, TTSL                                  1,200                        3,210             167.5                   12,841
Madhya Pradesh           RCOM, Idea, TTSL                                    1,200                        2,584             115.3                   10,334
West Bengal              Bharti, Vodafone, RCOM, Aircel                      1,200                        1,236               3.0                    6,182
Himachal Pradesh         Bharti, RCOM, Idea, S Tel                             300                          372              24.1                    1,862
Bihar                    Bharti, RCOM, Aircel, S Tel                           300                        2,035             578.2                   10,173
Orissa                   RCOM, Aircel, S Tel                                   300                          970             223.3                    3,879
Assam                    Bharti, RCOM, Aircel                                  300                          415              38.3                    1,659
North East               Bharti, RCOM, Aircel                                  300                          423              41.0                    1,692
Jammu & Kashmir          Bharti, RCOM, Idea, Aircel                            300                          303               1.0                    1,515
Total                                                                                                                                              677,190
Source: DoT, Nirmal Bang Institutional Equities Research; * Including the pay outs by MTNL and BSNL


                 6                                                                                                                   Telecom Sector
                                                                                              Institutional Equities
                                From a circle-wise perspective, key metro circles of Delhi and Mumbai commanded maximum prices, with the
                                winning price for Delhi touching Rs33.2bn, a 937% premium over the reserve price of Rs3.2bn while the
                                winning price for Mumbai was Rs32.5bn, a 915% premium over the reserve price. The ‘A’ category circles of
                                Maharashtra, Gujarat, Andhra Pradesh, Karnataka and Tamil Nadu also commanded a significant premium to
                                their reserve prices. As a matter of fact, the metro circles (including Kolkata) and ‘A’ category circles
                                accounted for 83% of the all-India winning price at the end of the auction, thus implying their higher level of
                                importance for 3G services. Given the highly aggressive bids by operators, no operator won pan-India 3G
                                spectrum. From a listed operator perspective, Bharti Airtel and RCOM won 3G spectrum in 13 telecom circles
                                while Idea Cellular won in 11 circles, with Bharti paying Rs123bn, RCOM Rs85.9bn and Idea Rs57.7bn.
                                Again, the aggressive bids by operators were for only 5MHz of 3G spectrum, which is considerably lower than
                                what operators own in other countries, such as the UK where 3G operators including Vodafone own 15MHz of
                                3G spectrum, thus enabling better quality and variety of data and voice services to customers.
                                Immediately following the 3G auction was the broadband wireless access (BWA) spectrum auction. Given that
                                no operator was able to win pan-India 3G spectrum, bidding for this spectrum was even more fierce than the
                                3G auction, with the eventual discovered price for pan-India BWA spectrum at Rs128.5bn, a significant 634%
                                premium to the reserve price of Rs17.5bn. Circles like Mumbai and Delhi commanded a massive over 1,300%
                                premium to their reserve prices. Given the extraordinarily high and irrational bids put in, only Bharti among the
                                listed players managed to win BWA spectrum and that too in just four circles – Maharashtra, Karnataka,
                                Kolkata and Punjab. The company paid Rs33.1bn for BWA spectrum, a significant 653% higher than the total
                                reserve price for these circles. The other listed mobile players– RCOM and Idea Cellular – dropped out of the
                                race several days before the completion of the auction. As was the case in the 3G auction also, it was the
                                government that benefited the most from the BWA auction, with total revenues at Rs385.4bn including
                                payments by Bharat Sanchar Nigam/Mahanagar Telephone Nigam (BSNL/MTNL). Thus, overall revenues
                                earned by the government through the 3G and BWA auctions stood at a colossal Rs1.06trn, over 3x
                                the original target of Rs350bn.
Exhibit 4: BWA spectrum auction circle-wise winning prices, winners
Circle                         Winning bidders             Reserve price (Rsmn)   Winning price (Rsmn)        Premium (%)       Govt.rev.(Rsmn)*
Delhi                          Infotel, Qualcomm                          1,600                 22,410             1,300.6                67,231
Mumbai                         Infotel, Qualcomm                          1,600                 22,930             1,333.1                68,789
Maharashtra                    Bharti, Infotel                            1,600                  9,156               472.3                27,469
Gujarat                        Infotel, Tikona                            1,600                  6,139               283.7                18,416
Andhra Pradesh                 Aircel, Infotel                            1,600                 10,591               562.0                31,774
Karnataka                      Bharti, Infotel                            1,600                 15,433               864.5                46,298
Tamil Nadu                     Aircel, Infotel                            1,600                 20,695             1,193.4                62,084
Kolkata                        Bharti, Infotel                             600                   5,232               772.0                15,696
Kerala                         Infotel, Qualcomm                           600                   2,587               331.1                 7,760
Punjab                         Bharti, Infotel                             600                   3,323               453.8                 9,968
Haryana                        Infotel, Qualcomm                           600                   1,199                99.8                 3,597
Uttar Pradesh (East)           Infotel, Tikona                             600                   1,425               137.5                 4,275
Uttar Pradesh (West)           Infotel, Tikona                             600                   1,839               206.5                 5,516
Rajasthan                      Infotel, Tikona                             600                     973                62.2                 2,920
Madhya Pradesh                 Infotel, Augere                             600                   1,247               107.8                 3,740
West Bengal                    Aircel, Infotel                             600                     710                18.3                 2,129
Himachal Pradesh               Infotel, Tikona                             150                     207                37.7                   620
Bihar                          Aircel, Infotel                             150                     993               561.9                 2,978
Orissa                         Aircel, Infotel                             150                     636               324.2                 1,909
Assam                          Aircel, Infotel                             150                     330               120.1                  991
North East                     Aircel, Infotel                             150                     213                41.8                  638
Jammu & Kashmir                Aircel, Infotel                             150                     213                41.8                  638
Total                                                                                                                                   385,433
Source: DoT, Nirmal Bang Institutional Equities Research
* Including the pay outs by MTNL and BSNL




                7                                                                                                            Telecom Sector
                                                                         Institutional Equities
    For both 3G and BWA spectrum, Bharti paid Rs156.1bn (availing debt of Rs63.8bn for the same), RCOM
    Rs85.9bn and Idea Rs57.7bn (the latter two only 3G spectrum). Owing to significant fund requirements, the
    debt on telecom companies’ balance sheets increased significantly, thus raising financial leverage. Bharti’s net
    debt-equity ratio and net debt-EBITDA ratio post-auction rose to 1.4x and 3.4x, respectively, in 1QFY11
    versus 0.06x and 0.15x in 4QFY10. For Idea, the ratios rose to 0.83x and 3x, respectively, (0.45x and 1.5x
    before the auction), while for RCOM they rose to 0.73x and 4.4x, respectively, (0.5x and 3.1x before the
    auction). It should be noted that Bharti had also acquired Zain Africa during this period for an enterprise value
    (EV) of US$10.7bn, availing debt of Rs461bn for the same and thereby further increasing the debt on its
    books. In FY11 also, while financial leverage fell slightly as compared with the period immediately after the
    auctions (and Zain acquisition for Bharti), it was still considerably higher from the period prior to the auctions.
    Exhibit 5: Net debt-equity ratio pre, post-3G, BWA auctions and FY11 – Significant rise
                        (x)
                        1.5


                        1.2


                        0.9


                        0.6


                        0.3


                        0.0
                                   Bharti Airtel               Idea Cellular              RCOM
                                         Pre-3G, BWA auction       Post-3G, BWA auction   FY11

    Source: Respective companies

    Exhibit 6: Net debt-EBITDA ratio pre, post-3G, BWA auctions and FY11
                        (x)
                        4.5

                        3.6

                        2.7

                        1.8

                        0.9

                        0.0
                                   Bharti Airtel               Idea Cellular              RCOM
                                        Pre-3G, BWA auction        Post-3G, BWA auction    FY11

    Source: Respective companies

    Given the significant payouts for 3G and BWA spectrum auctions as well as Zain acquisition by Bharti, the
    total intangibles on the balance sheets of telecom companies rose significantly. To cite an example, for
    Bharti the licence component of intangible assets rose from Rs12.1bn in FY10 to Rs235.6bn in FY11
    (a massive 1,848% rise), mainly because of spectrum auctions. Owing to the Zain acquisition,
    goodwill also ballooned from Rs42.2bn to Rs388.1bn, a surge of 819%. Goodwill and intangibles
    accounted for a significant 43.5% of Bharti’s balance sheet size in FY11 as compared to just 8.4% in FY10.
    For Idea, net intangible assets rose by over 3x from Rs16.2bn in FY10 to Rs48.9bn in FY11, while
    capital work-in-progress increased from Rs5.5bn in FY10 to Rs36.5bn in FY11 (a combined 28.3% of
    balance sheet size as against 9.2% in FY10). For RCOM, capital work-in-progress rose from Rs116.6bn
    in FY10 to Rs181.9bn in FY11, up to 19.2% of its balance sheet size (12.6% in FY10).




8                                                                                                 Telecom Sector
                                                                                Institutional Equities
    Exhibit 7: Surge in goodwill, intangible assets
                          (Rsmn)                                                                  (% of balance sheet)
                          650,000                                                                                  50

                          520,000                                                                                    40

                          390,000                                                                                    30

                          260,000                                                                                    20

                          130,000                                                                                    10

                                 0                                                                                   0
                                                     FY10                                  FY11
                                 Bharti       Idea        RCOM         Bharti (RHS)      Idea (RHS)       RCOM (RHS)

    Source: Respective companies, Nirmal Bang Institutional Equities Research

    Owing to these factors, interest and amortisation costs will surge in FY12 as telecom companies start
    expensing interest on loans taken for payment of 3G and BWA spectrum licence fees as well as amortisation
    post service launch. As a result, even as we forecast decent EBITDA growth for Bharti and Idea in FY12,
    earnings are likely to fall.
    Exhibit 8: Interest costs, amortisation to exert pressure on earnings growth in FY12
                          (% growth)
                          160

                          125

                           90

                           55

                           20

                          (15)
                                          EBITDA       Gross interest costs     Depn. & Amortn.         Net profit
                                                            Bharti Airtel         Idea Cellular

    Source: Nirmal Bang Institutional Equities Research

    Consensus estimates optimistic on FY13 margins, EPS; we are below consensus by 12-18%
    We forecast decent earnings growth in FY13 for these three telecom companies owing to margin expansion
    and the impact of higher amortisation and interest costs getting factored in. Nonetheless, we are still well
    below consensus earnings forecasts. For Bharti, our FY13E EPS is 17.7% below consensus estimates,
    for Idea 11.9% and RCOM 12.3%. We believe while consensus revenue forecasts appear reasonable
    (our forecasts are within a 1-5% range), EBITDA margin forecasts appear too optimistic. Our FY13
    EBITDA margin forecasts for Bharti are 182bps lower than consensus, for Idea they are 111bps lower
    and for RCOM they are 55bps lower. Owing to the lower margin forecasts, our FY13 EPS estimates
    are well below consensus as mentioned above.




9                                                                                                                    Telecom Sector
                                                                                      Institutional Equities
     Exhibit 9: NBIE research estimates vs. Bloomberg consensus estimates for FY13
     Particulars (FY13E)                Bloomberg Consensus                                NBIE Research                       Variation (%)
                                                                      Bharti Airtel
     Revenues (Rsmn)                                     823,000                                    841,283                              2.2
     EBITDA (Rsmn)                                       299,915                                    291,298                            (2.9)
     EBITDA margin (%)                                      36.4                                       34.6                        (182bps)
     EPS (Rs)                                                  25.7                                    21.1                           (17.7)
                                                                  Idea Cellular
     Revenues (Rsmn)                                     230,571                                    241,467                              4.7
     EBITDA (Rsmn)                                           64,071                                  64,408                             0.5
     EBITDA margin (%)                                         27.8                                    26.7                        (111bps)
     EPS (Rs)                                                   4.2                                      3.7                          (11.9)
                                                         Reliance Communications
     Revenues (Rsmn)                                     233,733                                    232,391                            (0.6)
     EBITDA (Rsmn)                                           77,243                                  75,527                            (2.2)
     EBITDA margin (%)                                         33.0                                    32.5                         (55bps)
     EPS (Rs)                                                   6.5                                      5.7                          (12.3)
     Source: Bloomberg, Nirmal Bang Institutional Equities Research

     Tariff hikes likely reason for optimism on consensus margin; too early to turn positive
     We believe that one of the main reasons for consensus optimism on EBITDA margin is the recent tariff hikes
     effected by telecom companies including Bharti and Idea. These companies raised tariff for on-net calls by up
     to 20% for both per-second billing (from 1.0 paisa to 1.2 paisa) and per-minute billing (50 paise to 60 paise)
     across all major circles. Based on our calculations, the tariff hikes will have around 4-5% impact on revenue
     per minute (RPM) in FY13.
     While our FY13 revenue forecasts are within a narrow range for all these three companies, we are 182bps
     below FY13 consensus margin forecasts for Bharti, 111bps below consensus for Idea and 55bps below
     consensus for RCOM. In our view, a significant rise in costs and decline in profitability were the main drivers
     for the tariff hikes, rather than any indication of improved pricing power. For example, Bharti’s India and
     South Asia (SA) EBITDA margin steadily declined from 40.2% in 2QFY10 to 33.7% in 2QFY12. On the
     costs side, owing to the need to expand coverage area and a rise in diesel costs, network operating
     costs (NOC) rose to 31.4% of India and South Asia revenues in 2QFY12, from 26.9% in 2QFY10. Thus,
     we are of the view that the tariff hikes are more a function of higher costs rather than improved pricing power
     and consequently, our margin forecast is below consensus estimate. We believe the need to build networks
     to boost 3G penetration in order to recover the huge investments made in 3G spectrum is likely to
     keep the NOC at higher levels, thus ensuring that margin expansion is unlikely to be achieved to the
     extent factored in by consensus forecasts.
     Exhibit 10: Bharti India & SA margins – Facing pressure from higher NOC, falling RPM
                           (% of India & SA revenues)                                                               (Paise)
                           45                                                                                           60

                           41                                                                                           56

                           37                                                                                           52

                           33                                                                                           48

                           29                                                                                           44

                           25                                                                                           40
                                2QFY10           4QFY10                 2QFY11             4QFY11             2QFY12
                                 Revenues per minute (RHS)                            NOC as % of India & SA mobile revenues
                                 India & SA mobile margins

     Source: Company




10                                                                                                                       Telecom Sector
                                                                                    Institutional Equities
     Exhibit 11: Bharti, Idea RPMs – Improvement in FY13 after sustained decline
                           (Paise)
                           70


                           64


                           58


                           52


                           46


                           40
                                      FY09            FY10                   FY11            FY12E          FY13E
                                                             Bharti Airtel           Idea Cellular

     Source: Respective companies, Nirmal Bang Institutional Equities Research

     Regulatory risks remain – NTP 2011 more a directional perspective
     On 10 October 2011, Telecommunications and Information Technology Minister Kapil Sibal unveiled the draft
     National Telecom Policy (NTP) 2011. In our view, the policy provides more of a directional perspective and the
     measures that it suggests are, at this stage, proposals which could take time to implement. It is silent on key
     issues impacting the sector, notably freeing up of merger and acquisition (M&A) norms, ‘excess
     spectrum’, licence renewal charges and spectrum re-farming. Regards spectrum, a separate law will be
     enacted. TRAI has given its recommendations with respect to spectrum pricing, ‘excess spectrum’ charges,
     licence renewal, new M&A laws and spectrum re-farming, which we will elaborate in this report.
     A key highlight of NTP 2011 is its vision to move towards ‘One Nation-One Licence’, which implies that
     subscribers will be able to move to any part of the country without having to pay roaming charges to
     their respective service provider. This would make the concept of ‘telecom circles’ irrelevant. If
     implemented, this will be a negative for telecom companies, as GSM (Global System for Mobile) operators
     earn around 8.3% of their gross revenues from roaming, while CDMA (Code Division Multiple Access)
     operators earn around 5% roaming revenues, as per TRAI data. Assuming 50% of roaming revenues
     are international roaming revenues, around 4.2% of GSM operators’ and 2.5% of CDMA operators’
     gross revenues come from national roaming services. This would come down to zero if the ‘One
     Nation-One Licence’ becomes a reality.
     If this policy is implemented in FY13, Bharti’s EBITDA is likely to get adversely impacted by 3.4% from
     our current estimates, Idea’s by 7.8% and RCOM’s by 3.6%, while the adverse EPS impact is likely to
     be 9.2% for Bharti, 28.7% for Idea and 20.6% for RCOM. The significantly greater impact on the
     bottomline of Idea and RCOM is because of considerably lower bases these two companies have,
     which are thus much more sensitive to changes in profitability. Of course, it should be noted that, at this
     stage, this is an objective of NTP 2011 and needs to be debated before it finally becomes a law. The policy
     also aims to achieve ‘One Nation-Full Mobile Number Portability’.
     Exhibit 12: EBITDA, EPS sensitivity to roaming reduction
     Companies                  EBITDA             EBITDA post-                     Chg              EPS         EPS post-      Chg
     (FY13E)                    (Rsmn)          roaming (Rsmn)                       (%)             (Rs)     roaming (Rs)       (%)
     Bharti Airtel              291,298                 281,378                     (3.4)            21.1             19.2      (9.2)
     Idea Cellular               64,408                    59,406                   (7.8)             3.7              2.7     (28.7)
     RCOM                        75,527                    72,837                   (3.6)             5.7              4.6     (20.6)
     Source: TRAI, Nirmal Bang Institutional Equities Research




11                                                                                                                  Telecom Sector
                                                                  Institutional Equities
     Broadband – A key focus area of NTP 2011
     NTP 2011 appears to be strongly focused on improving broadband availability, given its potential to empower
     citizens and improve economic development. The policy envisages 175mn broadband subscribers by 2015
     and 600mn by 2020 at a minimum download speed of 2MBPS, an ambitious plan given that there were just
     13mn broadband subscribers at the end of October 2011, as per TRAI data. This implies a monthly addition of
     around 3.2mn users until the end of 2015 as compared to an addition of a mere 0.14mn in October 2011.
     During 2015-20, the 600mn target implies a monthly addition of more than 7mn users. NTP 2011 envisages
     efforts to recognise broadband connectivity as a basic necessity like education and aims to work towards the
     ‘Right to Broadband’. In addition, by the end of 2011, the policy aims to raise the download speed from
     256KBPS to 512KBPS and subsequently to 2MBPS by 2015 and a higher speed of 100MBPS on demand,
     later.
     Separate Spectrum Act to address all related issues
     NTP 2011 aims to make available 300MHz of spectrum by 2017 and a further 200MHz by 2020. Spectrum
     will be de-linked from licences and its price will be determined through a market-determined process,
     most likely by auction. Permission is likely for spectrum pooling, sharing and trading to ensure its efficient
     use. The policy also aims to prepare a roadmap for availability of additional spectrum every five years. A
     separate Spectrum Act will be enacted to deal with all issues connected with spectrum along with
     related terms and conditions.
     Licences to be issued under two separate categories
     NTP 2011 envisages two categories of licences – network service operator and service delivery
     operator. The objective is to de-link the licencing of networks from service delivery to end users in order to
     facilitate faster roll-out of services across the country.
     Other key focus areas
     The policy aims to increase rural tele-density from 36.8% currently to 60% by 2017 and further to 100% by
     2020. It also aims to promote domestic telecom manufacturing with an objective to enable local producers of
     telecom equipment to meet 80% of the Indian telecom sector’s demand by 2020. Indigenous research and
     development (R&D), innovation and manufacturing are also other focus areas of NTP 2011. An appropriate
     exit policy will also be framed for licencees. The policy also aims to work towards recognition of telecom as an
     infrastructure sector for both the wireless and wireline segments and to thus extend the benefits enjoyed by
     infrastructure companies to the telecom sector.
     TRAI recommendations on spectrum management and licensing framework – Nothing definite
     Sector regulator TRAI came out with its response to DoT’s observations on its May 2010/February 2011
     recommendations regarding spectrum management and licencing framework. By and large, the regulator
     reiterated its stance on some key issues, notably the definition of contracted and ‘excess spectrum’, ‘excess
     spectrum’ charges, spectrum pricing, licence renewal and spectrum re-farming. One area where the
     regulator has changed its stance is on spectrum sharing, allowing it between any two operators vis-a-
     vis its earlier stance of allowing spectrum sharing only between operators holding start-up spectrum.
     TRAI also set out fresh guidelines on merger and acquisition (M&A) activity in the sector, liberalising
     to an extent the subscriber and revenue market shares of the combined entity post-merger. However,
     other M&A guidelines related to spectrum holding limits, pricing and charges do not allow for
     meaningful M&A activity in the sector, in our view.
     Key recommendations
         For GSM operators – ‘Start-up spectrum’ defined as 4.4MHz, ‘contracted spectrum’ as 6.2MHz, ‘excess
         spectrum’ as above 6.2MHz and ‘prescribed limit of spectrum’ as 10MHz in Delhi/Mumbai and 8MHz in
         other circles.
         For CDMA operators – ‘Start-up spectrum’, ‘contracted spectrum’ and ‘prescribed spectrum’ defined as
         2.5MHz, 5MHz, and 5MHz (6.25MHz in Delhi and Mumbai), respectively, while ‘excess spectrum’ is
         above 5MHz.
         TRAI has made no changes to its February 2011 spectrum pricing recommendations of Rs17.7bn per
         MHz pan-India for 20 years (up to 6.2MHz of GSM spectrum) and Rs45.7bn for ‘excess spectrum’ beyond
         6.2MHz; spectrum in the 900MHz band and CDMA spectrum to be charged 1.5x this amount.


12                                                                                             Telecom Sector
                                                                       Institutional Equities
     Exhibit 13: Price of ‘contracted’ and ‘excess spectrum’ per MHz
     Telecom circle               Price of ‘contracted spectrum’ per MHz (Rsmn)     Price of ‘excess spectrum’ per MHz (Rsmn)
     Delhi                                                               1,498                                          2,497
     Mumbai                                                              1,011                                          1,573
     Kolkata                                                               495                                          476.0
     Maharashtra                                                         1,171                                          3,745
     Gujarat                                                             1,499                                        3,553.7
     Andhra Pradesh                                                      1,538                                          4,320
     Karnataka                                                           1,362                                          3,459
     Tamil Nadu (incl. Chennai)                                          1,874                                          4,261
     Kerala                                                                740                                          2,322
     Punjab                                                                729                                          1,806
     Haryana                                                               145                                          1,079
     UP (West)                                                             601                                          2,526
     UP (East)                                                           1,518                                          3,188
     Rajasthan                                                           1,060                                          2,788
     Madhya Pradesh                                                        877                                          2,545
     West Bengal                                                           448                                          2,170
     Himachal Pradesh                                                       93                                            281
     Bihar                                                                 510                                          1,537
     Orissa                                                                243                                            733
     Assam                                                                 104                                           313
     North East                                                            106                                           320
     Jammu & Kashmir                                                        76                                           229
     Total                                                              17,698                                        45,719
     Source: TRAI

         Operators holding ‘excess spectrum’ to be charged on a retrospective basis and operators to be charged
         for 2G spectrum based on new pricing norms on renewal – In our view, this is a key negative for
         incumbent GSM operators, mainly Bharti and Idea among the listed firms, given that they hold
         ‘excess spectrum’ above 6.2MHz in several circles; on renewal also, which starts from 2014
         onwards, depending on the circle these companies will have to pay significant sums of money to
         renew their licences, with the renewal period also likely to be just 10 years.
         As regards spectrum re-farming, TRAI remains in favour of this, but a point to note here is that in case
         900MHz spectrum is not re-farmed, operators holding such spectrum will not be allowed to participate in
         the 700MHz spectrum auction as and when it happens – We believe this is another negative for
         incumbent operators like Bharti, which hold 900MHz in several circles, having been among the
         first to launch services in these circles and thus, if they surrender this spectrum in return for less-
         efficient 1,800MHz spectrum, their capex will go up significantly so as to maintain coverage and
         quality of service for customers.
         TRAI has reiterated its view of bringing Infrastructure Provider-I (IP-1) and Internet Service Provider (ISP)
         licencees under licence fee mechanism and moving to a uniform 6% licence fee over the next four years
         i.e. by FY16 – If implemented, this would be a positive for the industry as it would result in savings
         in licence fees, but would be negative for tower companies and for telecom companies having
         captive towers.
     Exhibit 14: TRAI recommendations on licence fees (percentage of AGR)
     Service Provider                                      FY13                   FY14              FY15                FY16
     UASL/CMTS - Metro circles                                10                     9                  8                  6
     UASL/CMTS - Category 'A' circles                          9                     8                  7                  6
     UASL/CMTS - Category 'B' circles                          7                     6                  6                  6
     UASL/CMTS - Category 'C' circles                          6                     6                  6                  6
     ISP                                                       3                     4                  5                  6
     IP-I                                                      3                     4                  5                  6
     Source: TRAI



13                                                                                                     Telecom Sector
                                                                   Institutional Equities
         Spectrum sharing to be allowed between any two operators, which is a change from TRAI’s previous
         stance of allowing spectrum sharing between operators holding only start-up spectrum only; spectrum
         holdings of sharing operators would be seen at a combined level.
         As regards M&A activity, a new set of norms have been framed:
         (a) TRAI has relaxed market share ceiling norms for both adjusted gross revenue (AGR) and subscriber
             market share; there will be automatic approval if the merged entity’s AGR and subscriber market
             share is less than 35%, case-specific approvals between 35-60% and no M&A will be allowed if the
             AGR/subscriber market share exceeds 60%.
         (b) The combined entity cannot hold more than 25% of allotted spectrum in any circle.
         (c) Spectrum of the merged entity cannot exceed the ‘prescribed limit’, spectrum over this limit to be
             surrendered within a year of the transaction.
         (d) Spectrum price to be paid for ‘excess spectrum’ post merger should be computed on the basis of
             spectrum pricing norms recommended by TRAI; a deduction will be allowed for initial entry fees paid,
         (e) Spectrum transfer charge of 5%.
         (f) Spectrum usage charges to be based on combined spectrum of the merged entity.
     In our view, while liberalisation of market share norms is a positive, we do not expect any meaningful
     M&A activity in the sector owing to the likely high cost of acquisition, given the strict spectrum
     holding, pricing and charges proposed by TRAI.
     3G roaming arrangements – Another example of regulatory risk
     DoT has opposed 3G roaming arrangements between operators and is considering punitive measures against
     those who currently have intra-circle 3G roaming agreements in place. DoT's tough stance follows the
     aggressive position taken by the managements of major telecom operators Bharti Airtel, Vodafone, Idea
     Cellular, RCOM and Tata Teleservices in asking it for a refund of their 3G spectrum bid deposits with interest if
     it revokes permission for 3G roaming. DoT is likely to oppose these arrangements following a detailed analysis
     of TRAI’s assessment on 20 October 2010 and advice from its licence fee and access service divisions. The
     legal wing of the communications ministry has also supported the views put forward by several
     sections of DoT, which said 3G roaming deals among mobile phone companies violate licencing
     norms.
     This move will prevent telecom companies from offering high-end data services on a pan-India basis and thus,
     customers in circles where companies do not have licences to operate 3G services will be unable to access
     them. Bharti Airtel, Idea Cellular, Vodafone and Aircel have all signed 3G customers in circles where they
     were unable to win 3G spectrum through bilateral roaming agreements. The Access Wing has ruled that
     mobile companies cannot offer 3G services, declare tariff plans and acquire customers for this service in
     circles where they have not been allotted 3G spectrum, even as all GSM operators have always maintained
     that they are in complete compliance of the licence conditions. If telecom companies have to cancel 3G
     bilateral roaming arrangements, they will be unable to sign 3G customers from circles where they do not have
     3G spectrum and will have to wait until the next round of auctions as and when 3G spectrum is made available
     in the respective circles. Given that the base price for the next round of auctions will be set as the
     discovered price at the 3G auction held in May 2010, it will thus be more costly for telecom companies
     to acquire 3G spectrum in circles where they do not currently own it. This is yet another example of
     the regulatory risk that the sector faces.




14                                                                                              Telecom Sector
                                                                   Institutional Equities
     Slowdown in net subscriber addition – Reflects rising saturation in domestic market
     Over the past few months, the industry’s net subscriber addition fell significantly, from over 20mn in March
     2011 to just 7.8mn in October 2011, as per TRAI data. This, we believe, is a clear sign that the Indian telecom
     market is nearing saturation point and going forward, net subscriber addition will continue to steadily taper
     down. In October 2011, the total number of wireless subscribers in India stood at 881.4mn, implying a tele-
     density of 73.3%. Urban wireless tele-density stood at 160%, while rural wireless tele-density was 35.8%.
     Going forward, incremental subscriber addition will consist of rural subscribers who typically take time to ramp
     up usage. Thus, telecom companies need to drive revenue growth not by subscriber addition but by
     driving greater spending among existing subscribers through introduction of new services like 3G to
     drive higher data usage. Currently, data revenues as a percentage of total revenues in the domestic market
     considerably trail behind those in developed markets like the UK and the US, where operators earn anywhere
     between 25-40% of revenues from data services. In fact, data revenues of Indian telecom companies trail
     their counterparts in developing economies. As we have mentioned earlier in this report, data revenues of
     Bharti account for 14.5% of Indian mobile service revenues as compared with 26.6% of the Vodafone Group
     (both for 2QFY12), 32.2% of China Mobile (1HCY11), 35% of Celcom (3QCY11, Malaysian arm of Axiata
     Group) and 40% of XL (3QCY11, Indonesian arm of Axiata Group). Thus, data revenue growth is likely to be
     the key focus area for Indian companies going forward, apart from attempting to effect further tariff hikes.
     However, in our view, driving data revenue through 3G service is likely to take time given that it is a
     premium service and attempting to sustain revenue growth through tariff hikes is unlikely to be an
     easy task either, given TRAI’s aversion to such steps. Consequently, the saturation in the domestic
     market is likely to slow down future revenue growth for operators.
     Exhibit 15: Monthly mobile subscriber additions – Steadily declining trend
                        (Rsmn)
                        25


                        20


                        15


                        10


                         5


                         0
                             Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11

     Source: TRAI

     RoE, RoCE at multi-year lows
     Given the significant fund requirements of telecom companies in FY11 on account of 3G and BWA spectrum
     auctions (and Zain acquisition by Bharti in particular) and poor financial performances in terms of profitability
     owing to damaging price wars, returns on capital in the form of RoE and RoCE declined steeply. For Bharti,
     RoE in FY11 crashed by 1,144bps from 24.7% to just 13.3%, an all-time low ever since it started making
     profits at the net level way back in FY04. RoCE, on the other hand, fell 1,010bps to just 9.2% (19.3% in
     FY10). For Idea, RoE, which was already at a low level of 7.7% in FY10, declined marginally to 7.6% in
     FY11, while RoCE fell from 5.8% in FY10 to 5.5% in FY11. For RCOM, RoE declined 766bps from 10.9%
     in FY10 to a mere 3.2% in FY11, while RoCE slipped 147bps to just 3.4% in FY11 from 4.8% in FY10.
     Going forward also, we do not expect a significantly improved performance on this front. For both Idea and
     RCOM, we expect both RoE and RoCE to remain in single digit even in FY13, which is not even equal to their
     cost of capital.




15                                                                                               Telecom Sector
                                                                              Institutional Equities
     Exhibit 16: RoE – Disappointing performance
                             (%)
                             25

                             20

                             15

                             10

                             5

                             0
                                       FY10                     FY11              FY12E                    FY13E
                                                  Bharti Airtel         RCOM                  Idea Cellular

     Source: Respective companies, Nirmal Bang Institutional Equities Research

     Exhibit 17: RoCE – Not too enthusing
                             (%)
                             20

                             16

                             12

                             8

                             4

                             0
                                       FY10                  FY11                FY12E                    FY13E

                                                  Bharti Airtel        RCOM               Idea Cellular

     Source: Respective companies, Nirmal Bang Institutional Equities Research

     Financials – Expect FY13 performance to improve after a difficult FY12
     We expect the three companies under our coverage - Bharti Airtel, Idea Cellular and RCOM – to report 15.8%
     revenue CAGR over FY11-13E. We expect the tariff hikes effected in July 2011 to boost RPM and forecast
     around 4-6% improvement in FY13. Owing to this, we expect the respective mobile businesses of the three
     companies to be key revenue growth drivers going forward. We also expect the performance to be boosted by
     increased off-take of 3G services, which enjoy 3-4x higher ARPU as compared to 2G services. On the margin
     front, we expect EBITDA to record 14.7% CAGR. It should be noted that combined EBITDA margin of
     these three companies is expected to decline 113bps YoY in FY12 only on account of RCOM, which we
     expect will post a 730bps decline on account of the impact of the change in accounting policy for
     bandwidth sales, which inflated margins in FY11. In FY13, we expect a combined 49bps margin expansion
     owing to the tariff hikes effected and operating leverage. On the net profit front, after a decline in FY12 net
     profit owing to higher 3G-related interest and amortisation costs, we expect decent growth in FY13 mainly
     owing to margin expansion and the impact of the 3G-related interest and amortisation costs factored in.
     Exhibit 18: Bharti, Idea and RCOM – Combined financial performance over FY11-13E
     Particulars                                       FY11                    FY12E                           FY13E            CAGR (%)
     Revenues (Rsmn)                                980,132               1,120,243                       1,315,140                 15.8
     EBITDA (Rsmn)                                  327,738                   361,890                         431,233               15.6
     Net profit (Rsmn)                               82,910                    72,994                         105,026               12.5
     Revenue growth (%)                                  28.3                     14.3                           17.4                    -
     EBITDA margin (%)                                   33.4                     32.3                           32.8                    -
     Net profit growth (%)                             (43.2)                    (12.0)                          43.9                    -
     Source: Respective companies, Nirmal Bang Institutional Equities Research




16                                                                                                                      Telecom Sector
                                                                                   Institutional Equities
     Exhibit 19: Company-wise revenue, EBITDA and PAT CAGR for FY11-13E – Idea to outperform
                           (%)
                            35

                            25

                            15

                             5

                            (5)

                           (15)
                                       Revenue CAGR                  EBITDA CAGR                      PAT CAGR
                                                  Bharti Airtel        Idea Cellular           RCOM

     Source: Nirmal Bang Institutional Equities Research

     Exhibit 20: Mobile operating metrics
     Particulars                                        FY11                        FY12E                   FY13E               CAGR (%)
                                                                  Bharti Airtel*
     Mobile revenues (Rsmn)                          362,689                       416,586                 496,203                  17.0
     Mobile subscriber base (mn)                        167.7                          193.0                 213.5                  12.8
     ARPU (Rs/month)                                      202                           193                   203                    0.3
     RPM (Paise)                                           44.5                         43.1                     45.5                1.1
                                                                  Idea Cellular
     Mobile revenues (Rsmn)                          153,960                       193,697                 240,463                  25.0
     Mobile subscriber base (mn)                        89.5                         110.5                   127.3                  19.3
     ARPU (Rs/month)                                       167                          161                      169                 0.4
     RPM (Paise)                                           42.6                         42.7                     45.0                2.8
                                                                     RCOM
     Mobile revenues (Rsmn)                          165,762                       186,967                 215,199                  13.9
     Mobile subscriber base (mn)                        135.7                          158.5                 175.3                  13.7
     ARPU (Rs/month)                                      116                           106                   107                   (3.8)
     RPM (Paise)                                           44.2                         44.2                     45.9                1.9
     Source: Respective companies, Nirmal Bang Institutional Equities Research;
     * Mobile Services - India and South Asia business for Bharti Airtel

     Initiate coverage on telecom stocks with negative rating; Bharti, Idea rated Sell, RCOM rated Hold
     We initiate coverage on the Indian telecom sector with a negative view, with Bharti and Idea rated Sell
     and RCOM rated Hold. We believe the significant outperformance of Bharti and Idea compared to the
     Sensex has been primarily on account of expectations of significantly improved financial performance
     post the tariff hikes effected. We believe it is too early to turn positive based purely on this factor and
     are of the view that consensus estimates are too optimistic. We are 182bps below FY13 consensus
     EBITDA margins for Bharti, 111bps for Idea and 55bps for RCOM. On FY13 net profit estimates, we are
     17.7% below consensus estimates for Bharti, 11.9% for Idea and 12.3% for RCOM.
     We note the significant rise in financial leverage and intangibles on company balance sheets post 3G and
     BWA spectrum auctions (and Zain acquisition for Bharti) has led to a steep increase in interest and
     amortisation costs, thereby resulting in net profit declining consistently. Stocks have outperformed on the basis
     of expectations rather than actual delivery based on those expectations. Regulatory risks remain a reality, an
     ever-present Damocles’ sword, with the recent TRAI recommendations giving no respite on key issues like
     ‘excess spectrum’ charges and licence renewal; the much-touted easing of norms to encourage consolidation
     have not materialised either, with recommendations such as the spectrum limit, usage charges, transfer fee
     and ‘excess spectrum’ charges on merger suggested by TRAI making it fairly costly to acquire a competitor.
     Going forward, mobile subscriber addition is also expected to continue slowing down, making it imperative to
     drive incremental revenues through 3G data services rather than just voice, something, we believe, is likely to
     take a few years to evolve.


17                                                                                                                      Telecom Sector
                                                                            Institutional Equities
     We assign a Sell rating and a sum-of-the-parts (SOTP) target price of Rs300 to Bharti Airtel. The company
     has witnessed a significant rise in its financial leverage and intangible assets post 3G and BWA auctions, with
     a significant proportion of goodwill on the balance sheet owing to Zain acquisition. Mobile subscriber addition
     has been declining and in September 2011, dipped below the 1mn-mark for the first time in nearly six years
     followed by another two months of sub-1mn net addition in October and November 2011. With the TRAI
     recommendations favouring its earlier stance on key issues like ‘excess spectrum’ charges, licence renewal
     and spectrum re-farming and DoT indicating its opposition to the recent 3G roaming arrangements entered
     into by Bharti with Vodafone and Idea, this is a clear reflection that regulatory risk remains a reality for Bharti.
     Regulatory risks knock off Rs36 from our target price for Bharti. Despite having registered seven
     consecutive quarters of YoY net profit decline, the stock has still outperformed the Sensex by 15%
     over the past year even as the elusive ‘expectations-beating quarter’ is yet to materialise.
     We assign a Sell rating and a SOTP-based target price of Rs75 to Idea Cellular. The stock has outperformed
     the Sensex by 39% over the past year and consensus expectations appear to have factored in a slightly
     optimistic margin scenario in FY13. We are below consensus margins by 111bps and consensus EPS by
     11.9% for FY13 and believe the stock has run up ahead of fundamentals. We believe the tariff hikes are more
     a reflection of cost pressures rather than improved pricing power. Regulatory risks also abound, as TRAI has
     stood by its earlier recommendations on ‘excess spectrum’ charges, licence renewal and spectrum re-farming,
     which are likely to imply significant payouts for the company, particularly the latter two issues. Regulatory
     risks knock off Rs29 from our target price for Idea. Mobile subscriber additions are also in slowdown
     mode, which, we expect, will continue going forward.
     We assign a Hold rating and target price of Rs86 to RCOM. We assign an EV/EBITDA multiple of 4.5x to
     RCOM, which translates into a Rs28 per share value. This is at an 18% discount to the multiple we give
     Bharti for its domestic business, given RCOM’s inferior operating metrics and quality of subscribers,
     apart from its own worsening operating performance over the past several quarters and single-digit
     RoE and RoCE likely even until FY13. We value Reliance Infratel at a 50% discount to book value given low
     third-party tenancies, which translates into a Rs58 per share value. The slowdown in incremental subscriber
     addition coupled with the company’s inferior quality subscriber base versus peers as reflected by its lower
     active subscriber proportion and revenue market share, as also its low 2G revenue coverage in the circles that
     it has won 3G spectrum (56.6% vs 71% for Bharti and 82.7% for Idea) is likely to lead to its inability to
     effectively monetise 3G services despite having paid heavily for 3G spectrum (Rs85.9bn).
     Exhibit 21: Comparative analysis
     Particulars (FY13E)                                   Bharti Airtel*            Idea Cellular      Reliance Communications
     Consolidated revenue growth (%)                                17.3                      23.3                             12.3
     Consolidated EBITDA margin (%)                                 34.6                      26.7                             32.5
     Net profit growth (%)                                          44.2                      58.4                             30.0
     Mobile subscriber base (mn)                                  205.4                     127.3                            175.3
     Gross mobile revenues (Rsmn)                               496,203                   240,463                          215,199
     Gross mobile revenue growth (%)                                19.1                      24.1                             15.1
     Mobile ARPU (Rs/month)                                         203                       169                              107
     Mobile RPM (Paise)                                             45.4                      45.0                             45.9
     RoE (%)                                                        14.1                       9.0                              3.0
     RoCE (%)                                                       10.4                       8.5                              3.7
     PE (x)                                                         15.6                      21.9                             13.6
     EV/EBITDA (x)                                                   5.7                       5.6                              5.8
     Source: Nirmal Bang Institutional Equities Research;
     * For Bharti, mobile subscriber base, mobile ARPU and mobile RPM are only for India, while gross mobile revenue and gross mobile
     revenue growth are for the Mobile Services – India and South Asia business.




18                                                                                                          Telecom Sector
                                                                                                                  Institutional Equities
Bharti Airtel
Exhibit 22: 1-year forward PE                                                              Exhibit 23: 1-year forward EV/EBITDA
   (Rs)                                                                                     (Rs)
    750                                                                                     1,000                                                                                 15x


   600                                                                               30x      800


   450                                                                                        600                                                                                 10x
                                                                                     20x
   300                                                                                        400

                                                                                     10x                                                                                           5x
   150                                                                                        200


      0                                                                                           0
          Apr-05        Aug-06         Dec-07            Apr-09        Aug-10   Dec-11                Apr-05   Aug-06          Dec-07        Apr-09            Aug-10     Dec-11


Source: Nirmal Bang Institutional Equities Research                                        Source: Nirmal Bang Institutional Equities Research


Idea Cellular
Exhibit 24: 1-year forward PE                                                              Exhibit 25: 1-year forward EV/EBITDA
  (Rs)                                                                                       (Rs)
  200                                                                                       300
  180                                                                                55x
                                                                                                                                                                                  15x
  160                                                                                       250
  140                                                                                40x
                                                                                            200
  120
                                                                                                                                                                                  10x
  100                                                                                       150
   80                                                                                25x
   60                                                                                       100

   40                                                                                10x                                                                                           5x
                                                                                             50
   20
    0                                                                                         0
      Apr-07                       Nov-08                     Jun-10              Jan-12        Apr-07                    Nov-08                  Jun-10                    Jan-12


Source: Nirmal Bang Institutional Equities Research                                        Source: Nirmal Bang Institutional Equities Research


Reliance Communications
Exhibit 26: 1-year forward PE                                                              Exhibit 27: 1-year forward EV/EBITDA
   (Rs)                                                                                     (Rs)
  900                                                                                       1,200

  800
                                                                                            1,000
  700
  600                                                                                         800

  500                                                                                         600                                                                           20x
  400
                                                                                              400                                                                           15x
  300
  200                                                                                30x                                                                                    10x
                                                                                              200
                                                                                     20x
  100                                                                                                                                                                        5x
                                                                                     10x          0
     0
                                                                                                    Apr-06       Sep-07             Feb-09            Jul-10            Jan-12
      Apr-06              Sep-07                Feb-09             Jul-10       Jan-12


Source: Nirmal Bang Institutional Equities Research                                        Source: Nirmal Bang Institutional Equities Research




                   19                                                                                                                                           Telecom Sector
                 Institutional Equities




     Company Section




20                           Telecom Sector
                                                                                                                Institutional Equities


                                          Bharti Airtel
                                                                                                                             9 January 2012

                      Reuters: BRTI.BO; Bloomberg: BHARTI IN

                      High leverage, slowdown, regulatory risks abound                                                         SELL
                      Consistent deterioration in operating metrics, a steep increase in leverage,                             Sector: Telecommunications
                      regulatory risk and a slowdown in incremental subscriber addition drive our
Initiating Coverage




                      negative view on Bharti Airtel and we argue against its perceived ‘defensive’                            CMP: Rs331
                      nature. We believe, going forward, the above factors are likely to continue
                      exerting pressure on the stock. We assign a Sell rating and a SOTP-based target                          Target Price: Rs300
                      price of Rs300 to the stock, implying 9% downside from the CMP. It should be                             Downside: 9%
                      noted that our FY13 EPS estimate is 17.7% below consensus estimates.
                      ‘Defensive’ argument not a convincing one: Given that Bharti is largely a domestic
                                                                                                                               Harit Shah
                      theme not dependent on global economic prospects, some views on the street imply
                                                                                                                               harit.shah@nirmalbang.com
                      that the stock is a defensive bet in a volatile market. We do not concur with the
                      defensive stock argument for the following reasons: (1) Significant deterioration in
                                                                                                                               +91-22-3926 8068
                      operating metrics over the past few quarters as against the perceived stability of a
                      defensive stock (2QFY12 net profit fell 38.2% YoY, the seventh consecutive quarter of                    Key Data
                      decline), (2) A significant increase in financial leverage (over 500%) and a steep rise in               Current Shares O/S (mn)                                         3,797.5
                      goodwill and intangibles (964% increase, 42% of balance sheet size in 2QFY12), all of                    Mkt Cap (Rsbn/US$bn)                                   1,255.3/23.8
                      which do not characterise a defensive bet, and (3) Ever-present regulatory risks,
                                                                                                                               52 Wk H / L (Rs)                                                448/304
                      leading to a Rs138.6bn NPV relating to licence renewal and ‘excess spectrum’
                      charges, thereby shaving off Rs36 from our TP. Given 73% dollar-denominated debt,                        Daily Vol. (3M NSE Avg.)                                     6,356,558
                      this exposes Bharti to currency risks and if the rupee remains weak against the
                      dollar, it is likely to adversely impact cash flows by nearly Rs12bn in FY12.
                                                                                                                               Share holding (%)                Q4FY11 Q1FY12 Q2FY12
                      Net subscriber addition slowdown signifies rising saturation level: Over the past
                                                                                                                               Promoter                             68.3             68.3           68.3
                      few months, Bharti’s subscriber addition in India has fallen significantly and
                      stood at just 0.96mn in November 2011, the lowest in nearly six years. This, we                          FII                                  17.5             17.8           17.4
                      believe, is a sign that the Indian telecom market is nearing saturation and going                        DII                                    8.7             8.5            8.7
                      forward, subscriber addition will continue to steadily taper down. Going forward, it is                  Corporate                              3.7             3.7            4.1
                      apparent that incremental subscriber addition will consist of rural subscribers who
                                                                                                                               General Public                         1.8             1.7            1.5
                      typically take time to ramp up their usage. Thus, Bharti needs to grow revenues not
                      merely through subscriber addition but also through better pricing, which may not be
                      easy. Data revenue growth through 3G services is likely to take time to ramp up. Non-                    One Year Indexed Stock Performance
                      availability of vernacular content is another issue that could hamper 3G off-take.                         130

                      Valuation: We value Bharti on SOTP basis. We assign an EV/EBITDA multiple of 5.5x                          120

                      for the India business, 4.5x for the consolidated Africa business and EV/tower of                          110

                      Rs4.8mn for the passive infrastructure services business. Regulatory risks (one-time                       100

                      ‘excess spectrum’ fee and current value of licence renewal costs), knock off Rs36 from                      90


                      our TP. We arrive at an implied equity value of Rs1,139bn resulting in a TP of Rs300,                       80


                      which implies 9% downside from the CMP. Hence we assign a Sell rating to Bharti with
                                                                                                                                  70
                                                                                                                                     Jan-11   Mar-11   May-11    Jul-11     Sep-11    Nov-11     Jan-12
                      a target price of Rs300.                                                                                                 BHARTI AIRTEL              NSE S&P CNX NIFTY INDEX


                      Y/E Mar (Rsmn)                 FY09           FY10            FY11         FY12E            FY13E
                      Revenue                      369,616        418,472        594,672        717,495          841,283
                      YoY (%)                         36.8           13.2            42.1          20.7             17.3       Price Performance (%)
                      EBITDA                       151,679        167,633        199,664        244,131          291,298                                          1M              6M                1 Yr
                      EBITDA (%)                      41.0           40.1            33.6          34.0             34.6
                                                                                                                               Bharti Airtel                    (15.5)         (13.8)               (6.4)
                      Adj. PAT                      84,700         89,768         60,467         55,677           80,308
                      YoY (%)                         26.4            6.0          (32.6)          (7.9)            44.2       Nifty Index                       (5.6)         (15.5)           (21.4)
                      FDEPS (Rs)                      22.3           23.6            15.9          14.7             21.1       Source: Bloomberg
                      RoE (%)                         32.5           24.7            13.3          10.9             14.1
                      RoCE (%)                        26.2           19.3             9.2            7.7            10.4
                      P/E (x)                         14.8           14.0            20.8          22.6             15.6
                      EV/EBITDA (x)                    8.7            7.6             9.3            7.3             5.7
                      Source: Company, Nirmal Bang Institutional Equities Research


                                                                    Please refer to the disclaimer towards the end of the document.
                                                                             Institutional Equities
     Initiate coverage with Sell rating, target price of Rs300
     We value Bharti Airtel on SOTP basis, assigning enterprise value (EV) multiples to its India business
     (including mobile services – India & South Asia, tele-media services, enterprise services and others),
     consolidated Africa business and passive infrastructure services business. We assign an EV/EBITDA
     multiple of 5.5x for the India business, 4.5x for the consolidated Africa business and EV/tower of Rs4.8mn
     (book value) for passive infrastructure services business. We also adjust for regulatory risks faced by the
     company in the form of a one-time fee on ‘excess spectrum’ and current licence renewal costs, which knocks
     off Rs36 from our target price. After adjusting for debt, cash and short-term investments, the implied equity
     value of Bharti Airtel comes to Rs1,139bn, resulting in a target price of Rs300. This implies 9% downside
     from the CMP. Therefore, we assign a Sell rating to Bharti Airtel with a target price of Rs300.
     Exhibit 1: SOTP valuation
                                     India business - India & SA, tele-media, enterprise and others
     EBITDA (Rsmn, FY13E)                                                                                 181,709
     EV/EBITDA multiple (x)                                                                                    5.5
     EV (Rsmn)                                                                 (A)                        999,397
                                                           Consolidated Africa
     EBITDA (Rsmn, FY13E)                                                                                  59,008
     EV/EBITDA multiple (x)                                                                                    4.5
     EV (Rsmn)                                                               (B)                          265,538
                                                     Passive infrastructure services
     No. of towers (FY13E)                                                                                 87,500
     EV/tower (Rsmn)                                                                                           4.8
     EV (Rsmn)                                                                 (C)                        420,000
                                                                  Total
     EV (Rsmn)                                                 (D) = (A)+(B)+(C)                         1,684,935
     Cash and short-term investments (Rsmn, FY13E)                             (E)                          13,100
     Total debt (Rsmn, FY13E)                                                  (F)                         420,125
     Equity value (Rsmn)                                       (G) = (D)+(E)-(F)                         1,277,910
     No. of shares (mn)                                                        (H)                           3,798
     Equity value per share (Rs)                                     (I) = (G)/(H)                             337
                                                             Regulatory risk
     Present value of licence renewal costs (Rsmn)                            (J)                         105,507
     ‘Excess spectrum’ costs (Rsmn)                                           (K)                          33,083
     Total (Rsmn)                                                  (L) = (J)+(K)                          138,590
     Regulatory risk per share (Rs)                                (M) = (L)/(H)                               36
                                                              Target price
     Implied equity value (Rsmn)                                   (N) = (G)-(L)                         1,139,320
     Value per share (Rs)                                           (O) = (I)-(M)                              300
     Source: Nirmal Bang Institutional Equities Research

     Nirmal Bang Institutional Equities Research estimates vs. Bloomberg consensus estimates
     We believe Bloomberg consensus projections are too optimistic in terms of both EBITDA and EPS, even as
     revenue projections are realistic. We are largely in line with Bloomberg consensus estimates on the revenue
     front, while our EBITDA margin estimates are 38bps and 182bps lower than consensus estimates for
     FY12 and FY13, respectively. Consensus EBITDA margin projections factor in likely upside from the
     recently-effected tariff hikes. However, we believe tariff hikes are more a function of the rise in costs for
     telecom companies rather than any indication of improved pricing power for the sector and consequently, do
     not believe there is a case for modelling margin expansion owing to this factor alone. Due to lower margin
     estimates and higher interest and depreciation costs, our FY12 and FY13 EPS estimates are 10% and
     17.7%, respectively, below consensus estimates. We believe consensus expectations are a bit too high
     and any disappointment on this front, going forward, could be a key trigger for downside in the stock.




22                                                                                                    Bharti Airtel
                                                                            Institutional Equities
     Exhibit 2: Nirmal Bang Institutional Equities estimates vs Bloomberg consensus estimates
     Particulars                                      Bloomberg Consensus               NBIE Research           Difference (%)
                                                                  FY12E
     Revenues (Rsmn)                                                  713,750                  717,495                     0.5
     EBITDA (Rsmn)                                                    245,542                  244,131                    (0.6)
     EBITDA margin (%)                                                   34.4                     34.0                 (38bps)
     EPS (Rs)                                                             16.3                     14.7                 (10.0)
                                                                  FY13E
     Revenues (Rsmn)                                                  823,000                  841,283                     2.2
     EBITDA (Rsmn)                                                    299,915                  291,298                   (2.9)
     EBITDA margin (%)                                                   36.4                     34.6               (182bps)
     EPS (Rs)                                                             25.7                     21.1                 (17.7)
     Source: Bloomberg, Nirmal Bang Institutional Equities Research

     Amortisation of goodwill
     Although goodwill is not required to be amortised as per IFRS accounting standards followed by Bharti, we
     have considered a conservative scenario wherein if such goodwill is to be amortised over a period of five
     years it would result in a Rs21.9bn loss in FY12E net profit, while FY13E net profit would fall by nearly 97%
     to Rs2.7bn. RoE would decline by 1,550bps and 1,351bps in FY12E and FY13E to -4.6% and 0.5%,
     respectively, while RoCE would fall 527bps and 509bps to 2.4% and 5.4%, respectively, for the same period.
     Exhibit 3: Goodwill amortisation impact
     Particulars                                   Pre-goodwill amortisation     Post-goodwill amortisation     Difference (%)
                                                                 FY12E
     Profit after tax (Rsmn)                                           55,677                      (21,933)            (139.4)
     EPS (Rs)                                                            14.7                          (5.8)           (139.4)
     RoE (%)                                                              10.9                         (4.6)        (1,550bps)
     RoCE (%)                                                              7.7                           2.4          (527bps)
                                                                 FY13E
     Profit after tax (Rsmn)                                           80,799                        2,698              (96.9)
     EPS (Rs)                                                            21.3                          0.7              (96.6)
     RoE (%)                                                              14.1                            0.5       (1,351bps)
     RoCE (%)                                                             10.5                            5.4         (509bps)
     Source: Nirmal Bang Institutional Equities Research




23                                                                                                              Bharti Airtel
                                                                       Institutional Equities
     Investment Concerns
     Defensive bet – A weak argument
     Some views on the street appear to be that Bharti being a telecom company, a domestic theme not
     dependent on global economic prospects (which appear fairly bleak with the European debt crisis and US
     slowdown), is a strong ‘defensive’ bet in a volatile market. We do not concur with the defensive bet argument
     for the following reasons: (1) Significant deterioration in operating metrics over the past few quarters as
     against the perceived stability of a typical defensive bet (for example, 2QFY12 net profit witnessed a 38.2%
     YoY fall, the seventh consecutive quarter of decline; the elusive ‘expectations-beating quarter’ has still not
     materialised), (2) A significant increase in financial leverage (over 500%) and a steep rise in goodwill and
     intangibles (964% increase, 42% of balance sheet size in 2QFY12) do not characterise a typical defensive
     bet and, (3) Ever-present regulatory risks, leading to a Rs138.6bn imputed NPV relating to licence renewals
     and ‘excess spectrum’ charges, thereby limiting deleveraging and shaving off Rs36 from our SOTP-based
     target price. We elaborate on these points below:
     (1) Significant deterioration in operating metrics
     Bharti’s key operating metrics, particularly in India and South Asia mobile business, have witnessed steady
     deterioration over the past few quarters. Following intense competition in the sector, revenue per minute
     (RPM) fell steeply from 56.1 paise in 2QFY10 to 43.2 paise in 2QFY12, a decline of 23% over the
     period. On account of this factor and an increase in network operating costs as a percentage of sales
     (26.9% in 2QFY10 versus 31.4% in 2QFY12), Bharti’s India & SA mobile EBITDA margin declined from
     40.2% in 2QFY10 to 33.7% in 2QFY12. Given that India & SA EBITDA constitutes a major portion of
     consolidated EBITDA (55.8% in 2QFY12) the poor performance of this segment has also adversely
     impacted the consolidated EBITDA margin profile, with the same declining from 41.4% in 2QFY10 to
     33.6% in 2QFY12. This factor, along with higher depreciation and amortisation costs (up from Rs15.2bn in
     2QFY10 to Rs31.8bn in 2QFY12 on high capex and 3G amortisation) and interest costs led the company to
     report seven consecutive quarters of YoY net profit decline, with the same falling 38.2% YoY in 2QFY12.
     Despite poor financial performances, the stock has outperformed the Sensex over the past year by 15%. It is
     clear that the street is expecting the recent tariff hikes effected by the company to have a salutary impact on
     its financial performances going forward.
     Exhibit 4: Bharti Airtel vs BSE Sensex – Strong outperformer…
                        (Based to 100)
                       125

                       114

                       103

                        92

                        81

                        70
                         6-Jan-11        20-Mar-11    1-Jun-11       13-Aug-11    25-Oct-11   6-Jan-12
                                                     Bharti Airtel         BSE Sensex

     Source: C-line




24                                                                                                       Bharti Airtel
                                                                                Institutional Equities
     Exhibit 5: …but profitability not moving in sync…
                          (%)                                                                          (YoY growth, %)
                          43                                                                                       25

                          40                                                                                         10
                                                                        Seven consecutive quarters of YoY
                                                                        net profit decline
                          37                                                                                         (5)

                          34                                                                                         (20)

                          31                                                                                         (35)

                          28                                                                                         (50)
                                 2QFY10          4QFY10            2QFY11             4QFY11            2QFY12
                                          Consolidated EBITDA margins              Net profit growth (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research

     Exhibit 6: …following deteriorating operating metrics of India & SA mobile business…
                           (%)                                                                                   (Paise)
                          42                                                                                         60

                          40                                                                                         56

                          38                                                                                         52

                          36                                                                                         48

                          34                                                                                         44

                          32                                                                                         40
                                 2QFY10           4QFY10            2QFY11             4QFY11               2QFY12
                                             Revenues per minute (RHS)               EBITDA margins

     Source: Company, Nirmal Bang Institutional Equities Research

     Exhibit 7: …compounded by higher depreciation and interest costs below the EBITDA line
                           (Rsmn)                                                                                (Rsmn)
                          32,500                                                                                 15,000

                          28,500                                                                                 12,000

                          24,500                                                                                 9,000

                          20,500                                                                                 6,000

                          16,500                                                                                 3,000

                          12,500                                                                                 0
                                    2QFY10         4QFY10           2QFY11           4QFY11           2QFY12
                                          Depreciation & amortisation            Gross interest costs (RHS)

     Source: Company

     Our view on tariff hikes – Too early to turn positive on this factor alone
     Bharti has effected tariff hikes across all major circles in India. The company initially hiked tariffs (local and
     STD) by up to 20% in six circles depending upon the tariff plan, for both per-second and per-minute billing
     plans and for landlines; for calls to mobiles, the hikes were effected for on-net calls (calls made within Bharti’s
     network) and the company has since effected hikes across circles. The tariff hikes apply to new subscribers,
     while existing subscribers will move to the new tariff structure one year after staying on their current plan, as
     per Telecommunications Regulatory Authority of India (TRAI) regulations. Thus, this implies that it would take
     at least two quarters before the tariff hikes have a noticeable impact.


25                                                                                                                          Bharti Airtel
                                                                            Institutional Equities
     Exhibit 8: Tariff hikes effected
     Particulars                                                                   Earlier tariff                      Revised tariff
     Per-second billing (On-net)                                                1 paisa/second                      1.2 paisa/second
     Per-minute billing (On-net)                                               50 paise/minute                       60 paise/minute
     Calls to landlines                                                         Rs1.20/minute                         Rs1.50/minute
     Source: Company

     As per TRAI data, in the June 2011 quarter (the latest for which data is available) the GSM segment of the
     industry earned around 52.8% of its revenues from voice calls (mobile-to-fixed line local and STD, on-net
     local and STD, off-net local and STD, and ILD). From a traffic perspective, around 42.7% of minutes of usage
     (MoU) came from on-net local calls, 6.1% from on-net STD calls, 2% from mobile-to-fixed line local calls and
     0.6% from mobile-to-fixed line STD calls. Thus, around 51.4% of total traffic of the GSM segment was
     generated from on-net and mobile-to-fixed line local and STD calls. While revenue details are not available,
     we assume the revenue share of these call services to be 10% lower than the minutes (traffic) share at
     46.2% given lower average tariffs as compared with ILD and off-net STD tariffs, which along with off-net local
     calls account for the rest of GSM mobile traffic. While Bharti does not divulge details, we assume a 10%
     higher traffic generated by the company from on-net and mobile-to-fixed line local and STD calls, given the
     likelihood of greater on-net traffic owing to its subscriber and revenue market share leadership; there is a
     greater likelihood that a Bharti user would call another Bharti user than is the case for the overall segment.
     Thus, we assume 50.8% of Bharti’s India & SA voice revenues are generated from on-net and mobile-to-fixed
     line local and STD calls.
     This implies that based on our assumptions, around 27% of Bharti’s India & SA mobile revenues come from
     on-net and mobile-to-fixed line local and STD calls. Given the 20% tariff hike, the positive impact on RPM
     comes to 5.4%. Thus, we expect the net impact on RPM to be similar and model the same in our RPM
     assumption, which is expected to rise to 45.5 paise in FY13E from 43.1 paise in FY12E.
     Exhibit 9: Impact of tariff hikes on India & SA mobile RPMs
     Particulars                                                                                                                 (%)
     Revenue from voice calls as a percentage of total revenues                      (A)                                        52.8
     Traffic break-up (GSM segment, 1QFY12)
     On-net local calls                                                                                                         42.7
     On-net STD calls                                                                                                            6.1
     Mobile-to-fixed line local calls                                                                                            2.0
     Mobile-to-fixed line STD calls                                                                                              0.6
     Total for GSM segment                                                                                                      51.4
     Revenue break-up @ 10% discount                                                                                            46.2
     % of voice revenues for Bharti @ 10% premium                                       (B)                                     50.8
     % of total revenues impacted by tariff hike                              (C) = (A)*(B)                                     26.9
     Tariff hike                                                                        (D)                                     20.0
     Positive impact of tariff hike on RPM                                   (E) = (C)*(D)                                       5.4
     Source: Company, Telecommunications Regulatory Authority of India (TRAI), Nirmal Bang Institutional Equities Research

     While our FY13 revenue forecasts are within a narrow range for Bharti, our margin forecasts are 126bps
     below consensus expectations. In our view, a significant rise in costs and decline in profitability were main
     drivers for the tariff hikes rather than any indication of improved pricing power. For example, Bharti’s India &
     SA EBITDA margin steadily declined from 40.2% in 2QFY10 to 33.7% in 2QFY12. On the costs side, owing
     to the need to expand coverage area and a rise in diesel costs, network operating costs (NOC) rose to 31.4%
     of India and South Asia revenues in 2QFY12 from 26.9% in 2QFY10. Thus, we are of the view that the tariff
     hikes are more a function of higher costs rather than improved pricing power and consequently, our margin
     forecasts are below consensus estimates. We believe the need to build 3G networks to boost 3G service
     penetration in order to recover huge investments made in 3G spectrum is likely to keep NOC at
     higher levels, thereby ensuring that margin expansion is unlikely to be achieved to the extent
     factored in by consensus.




26                                                                                                                    Bharti Airtel
                                                                              Institutional Equities
     Exhibit 10: NOC to remain at higher levels
                           (% of sales)
                          25


                          23


                          21


                          19


                          17


                          15
                                      FY09           FY10            FY11          FY12E            FY13E

     Source: Company, Nirmal Bang Institutional Equities Research

     (2) Significant increase in financial leverage, goodwill and intangibles
     The debt picture
     Bharti’s gross debt in FY11 rose significantly to Rs616.7bn from Rs101.9bn in FY10, a rise of over 500%; net
     debt rose to Rs600.9bn (Rs24.2bn in FY10), a huge increase of 2,372%. Consequently, the company’s net
     debt-equity ratio rose to 1.2x in FY11 (0.1x in FY10), while net debt-EBITDA ratio stood at 3x (0.1x in FY10).
     In 2QFY12, net debt-to-equity ratio stood at 1.3x and net debt-EBITDA ratio at 2.8x. The debt burden rose
     owing to two major events - Zain acquisition and 3G and broadband wireless access (BWA) spectrum
     auctions. In its largest-ever acquisition, Bharti acquired Zain Africa for US$10.7bn including US$1.7bn debt
     on Zain’s books w.e.f. 8 June 2010. As a result, Bharti’s debt ballooned to over 6x. Of the total gross debt of
     the group and joint ventures, 97.5% carries a floating rate and 73% is US dollar-denominated (Rs454.3bn).
     For every 100bps increase in floating rate, our FY12E pre-tax profit estimate gets adversely impacted
     to the tune of 6.2%. As regards the 3G spectrum auction, Bharti won spectrum in 13 telecom circles paying
     Rs123bn for the same, while in the BWA spectrum auction it won spectrum in four circles paying Rs33.1bn.
     Bharti borrowed Rs461bn for Zain acquisition and Rs63.8bn for 3G and BWA spectrum licences.
     Exhibit 11: Gross debt, maturity profile – Significant increase
     Particulars (Rsmn)                                               FY10                         FY11              Change (%)
     Within one year                                                 20,424                     84,370                      313.1
     1-2 years                                                       18,250                    112,213                      514.9
     2-5 years                                                       43,036                    327,706                      661.5
     Over 5 years                                                    21,074                     96,492                      357.9
     Total                                                          102,784                    620,781                      504.0
     Source: Company

     Exhibit 12: FY11 gross debt break-up – Dominated by US dollar-denominated debt
     (Rsmn)                    Fixed rate    Floating rate   Total borrowing    % of total debt     % fixed rate   % floating rate
     INR-denominated               9,906         90,897              100,803                16.2             9.8             90.2
     USD-denominated                   0        454,332              454,332                73.2             0.0            100.0
     JPY-denominated                   0         16,626               16,626                 2.7             0.0            100.0
     NGN- denominated                  0         35,178               35,178                 5.7             0.0            100.0
     XAF-denominated               4,292          1,107                5,399                 0.9            79.5             20.5
     Others                        1,016          7,427                8,443                 1.4            12.0             88.0
     Total                        15,214        605,567              620,781               100.0             2.5             97.5
     Source: Company




27                                                                                                                 Bharti Airtel
                                                                                    Institutional Equities
     Exhibit 13: Earnings sensitivity to 100bps increase in dollar-denominated floating rate loans
     Particulars                                                                                                                    Rsmn
     USD-denominated floating rate debt                                                                                           454,332
     Additional interest costs due to 100bps rise in floating rate                                                                  4,543
     FY12E PBT                                                                                                                     73,714
     FY12E PBT less additional interest costs                                                                                      69,170
     Adverse impact on FY12E PBT (%)                                                                                                   6.2
     Source: Company, Nirmal Bang Institutional Equities Research
     Given the significant foreign currency (FC) exposure, Bharti is exposed to currency risks. In FY11, the
     company had Rs520bn FC loans on its books, of which a significant majority (Rs454.3bn, or ~US$8.6bn, at
     the current exchange rate) is US dollar-denominated debt. Bharti also had Rs65.3bn as equipment supply
     payables, mostly denominated in US dollar and euro, as a significant portion of the company’s network
     equipment and services is provided by European vendors like Ericsson. Thus, Bharti had around Rs585.3bn
     (~US$11.1bn) FC exposure at the end of FY11.
     According to Bharti’s FY11 Annual Report, a 5% increase in the US dollar rate against the rupee could have
     a Rs5.2bn adverse impact on FY11 net profit (6.8%), while a similar movement against the Japanese yen
     would have a Rs1bn impact (1.3%). It should be noted that at the current exchange rate, the rupee has
     depreciated 18.2% against the greenback versus the closing rate as on 31 March 2011, while against the yen
     the rupee depreciated by as much as 26.4%. This implies a potential negative impact of Rs19bn on FY12E
     pre-tax profit (25.8%) because of dollar appreciation and negative impact of Rs5.4bn (7.4%) due to yen
     appreciation. Thus, if the rupee remains at the current level against the dollar and yen, our FY12E pre-tax
     profit estimate would be lower by Rs24.4bn, or 33.2%.
     From a cash flow perspective, given that Rs84.4bn of debt is due for repayment in FY12, if the rupee
     stays at current levels, we calculate an additional cash outflow of Rs11.2bn on its dollar-denominated
     debt and Rs597mn on its Yen-denominated debt. This is assuming over 75% of the debt due for
     repayment in the fiscal is denominated in these two currencies, as seen in Exhibit 12.
     Exhibit 14: Currency risk quantified – US dollar and Japanese yen
                                                   Change in         Impact on FY11         Actual change         Impact on
     Particulars                                                                                                                Impact (%)
                                             currency rate (%)          PBT (Rsmn)                 to-date       FY12E PBT
     US dollar vs Indian rupee                              5.0                5,230                  18.2           19,038           25.8
     Japanese yen vs Indian rupee                           5.0                1,027                  26.4            5,429            7.4
     Source: Company, Nirmal Bang Institutional Equities Research
     We factor in gross interest costs of 44.1bn in FY12E, up 74% YoY (Rs25.3bn in FY11). This is a key factor
     exerting pressure on net profit. With the rupee having depreciated to such an extent, it is likely to exert further
     pressure on earnings, particularly if the currency remains weak for an extended period going into FY13. We
     currently factor in a closing rate of Rs52 per dollar in 4QFY12, lower by 16.6% as compared with the closing
     rate of Rs44.59 in FY11. Bharti has already reported forex losses to the tune of over Rs4bn in 1HFY12, partly
     because of weakness in the rupee and partly due to weakness in the respective local currencies of Africa
     against the greenback. This is one of the key reasons as to why our EPS estimates for both FY12 and
     FY13 are well below consensus estimates; our net interest costs (gross interest costs less interest
     costs and other income) are Rs37.6bn and Rs39.7bn for FY12E and FY13E, respectively, as compared
     with consensus estimates of Rs32.8bn and Rs26.6bn, respectively.
     Exhibit 15: Interest costs to exert pressure on earnings in FY12
                                (% growth)
                                80


                                62


                                44


                                26


                                  8


                                (10)
                                                 EBIT                Gross interest costs           Net profit

     Source: Nirmal Bang Institutional Equities Research


28                                                                                                                            Bharti Airtel
                                                                    Institutional Equities
     Goodwill and intangible assets scenario
     Owing to the Zain acquisition and 3G and BWA spectrum costs, Bharti’s intangible assets rose 964%
     to Rs637.3bn (Rs59.9bn). Goodwill accounted for Rs388.1bn (819% increase) and licences Rs235.6bn
     (1,848% increase). Zain accounted for 89% of goodwill, while the significant rise in licence costs was
     due to 3G and BWA spectrum. Goodwill and intangibles accounted for as much as 44% of Bharti’s balance
     sheet size in FY11 and 42% in 2QFY12.
     Exhibit 16: Intangible assets break-up – Goodwill, licences account for a lion’s share
     Particulars (Rsmn)                                         FY10                    FY11              Change (%)
     Goodwill                                                  42,240                 388,050                   818.7
     Software                                                   2,134                   4,016                    88.2
     Bandwidth                                                  3,009                   5,234                    73.9
     Licence                                                   12,094                 235,571                  1,847.8
     Other acquired intangibles                                   413                   4,446                    976.5
     Total                                                     59,890                 637,317                   964.1
     Source: Company

     Exhibit 17: Goodwill break-up – Africa accounts for 89%
     Particulars (Rsmn)                                         FY10                    FY11              Change (%)
     Mobile services - India & SA                              38,148                  37,789                    (0.9)
     Enterprise services                                        4,092                   4,050                    (1.0)
     Mobile services - Africa                                       -                 346,211                       -
     Total                                                     42,240                 388,050                   818.7
     Source: Company

     Bharti follows IFRS accounting standards, according to which goodwill is not amortised but tested for
     impairment once a year. The company tests goodwill for impairment annually on 30 September. For FY11, no
     impairment was observed and thus there was no impact on Profit & Loss Account. Post 30 September 2011
     also, no impairment charges have been taken into account. However, given the Rs388.1bn goodwill on its
     books at the end of FY11, risks of impairment to underlying assets remain and if competition in Africa
     worsens - as has been witnessed in India over the past three years - all these factors pose as risks to
     earnings. It should be noted that owing to intense competition in India, global telecom major Vodafone in May
     2010 went for a significant £2.3bn write-off on its Indian asset citing deteriorating market conditions, including
     intense price competition and regulatory risks. Thus, Bharti also faces similar risks in Africa if the competitive
     environment worsens in that region, apart from currency risks. If we amortise goodwill related to Zain
     Africa acquisition over a period of five years, our FY13 net profit estimate would plunge 76%.
     (3) Regulatory risk – An ever-present Damocles’ sword
     The telecom sector is subject to significant regulatory risks, with policy making on critical issues like spectrum
     allocation, merger and acquisition and granting of licences decided by DoT. Consequently, policies may or
     may not go in favour of specific companies including Bharti. One such example is TRAI’s recommendations
     on the pricing of ‘excess spectrum’ above 6.2MHz (megahertz). The regulator had in February 2011 come up
     with its recommendations on pricing of ‘excess spectrum’, based on a report by an expert group. Telecom
     companies holding excess spectrum above the ‘contracted limit’ of 6.2MHz have to pay ‘excess spectrum’
     charges on a pro-rata basis w.e.f. 1 April 2010 until the end of the licence period in respective circles. In the
     event of licence renewal also, these will be the prices that telecom companies have to pay. In November
     2011, TRAI, in its suggestions to DoT regarding spectrum management and licencing framework,
     reiterated these recommendations. TRAI’s expert committee arrived at a price of Rs17.7bn (~US$336mn)
     per MHz for pan-India contracted spectrum up to 6.2MHz and Rs45.7bn (~US$868mn) per MHz for spectrum
     above 6.2MHz. Thus, on this basis Bharti will have to pay Rs33.1bn for its ‘excess spectrum’ holding,
     by far the highest among all telecom companies (Refer Exhibit 18). This translates into a Rs9/share
     impact for the company.




29                                                                                                       Bharti Airtel
                                                                                 Institutional Equities
     Exhibit 18: Circle-wise break-up of ‘excess spectrum’ charges – Bharti to bear maximum brunt
     Telecom circle (MHz)                                Bharti Airtel (GSM)        Idea Cellular (GSM)     RCOM (GSM, CDMA)
     Delhi                                                                 10                           8                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   2,230                      2,585                      0
     Mumbai                                                                9.2                        4.4                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   2,714                           0                     0
     Kolkata                                                                 8                        4.4                6.2, 5
     ‘Excess spectrum’ charges (Rsmn)                                     201                           0                     0
     Maharashtra                                                           8.2                        9.8                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   4,306                      3,842                      0
     Gujarat                                                               6.2                        6.2            4.4, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Andhra Pradesh                                                        10                           8                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   4,678                      2,235                      0
     Karnataka                                                             10                         6.2                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   3,861                           0                     0
     Tamil Nadu (incl. Chennai)                                            9.2                        4.4                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   3,643                           0                     0
     Kerala                                                                6.2                          8                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                        0                     1,191                      0
     Punjab                                                                7.8                        7.8            4.4, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                     823                        867                      0
     Haryana                                                               6.2                        6.2            4.4, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Uttar Pradesh (West)                                                  6.2                          8                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                        0                     1,296                      0
     Uttar Pradesh (East)                                                  7.2                        6.2                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   2,199                           0                     0
     Rajasthan                                                             8.2                        6.2            4.4, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                   1,701                           0                     0
     Madhya Pradesh                                                          8                          8                6.2, 5
     ‘Excess spectrum’ charges (Rsmn)                                   2,634                      1,305                      0
     West Bengal                                                           6.2                        4.4            6.2, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Himachal Pradesh                                                      6.2                        4.4              6.2, 2.5
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Bihar                                                                 9.2                        4.4                  8, 5
     ‘Excess spectrum’ charges (Rsmn)                                   3,181                           0                  788
     Orissa                                                                  8                        4.4            6.2, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                     910                           0                     0
     Assam                                                                 6.2                        4.4              6.2, 2.5
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     North East                                                            6.2                        4.4              6.2, 2.5
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Jammu & Kashmir                                                       6.2                        4.4              4.4, 2.5
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Total ‘excess spectrum’ charges (Rsmn)                            33,083                     13,321                   788
     Per share impact (Rs)                                                   9                          4           Negligible
     Source: TRAI, Nirmal Bang Institutional Equities Research

     However, we believe licence renewal is a greater concern for Bharti. Given that the licence period is 20
     years, the telecom major’s licences are up for renewal from 2014 onwards. Given the rates recommended
     by TRAI, Bharti will have to pay Rs173bn between 2014-25 for renewing its licences assuming that
     spectrum awarded on renewal is capped at the ‘prescribed limit’, which is 10MHz for Delhi and
     Mumbai and 8MHz for other circles. We calculate the current value of this based on a risk-free rate of
     8%, which amounts to Rs105.5bn (~US$2bn), or Rs27/share. Thus, regulatory risks related to licence
     renewal and ‘excess spectrum’ charges knock off Rs36 from our target price for Bharti.




30                                                                                                                 Bharti Airtel
                                                                                 Institutional Equities
     The prospects of licences getting renewed for a shorter period of time of 10 years is also another
     negative for the company. We believe spectrum re-farming is also a key negative and with TRAI
     reiterating its support for this in its latest recommendations to DoT, this could lead to the company
     giving up lucrative and more capex-efficient 900 MHz spectrum for less capex-efficient 1,800 MHz
     spectrum in key circles like Delhi, Andhra Pradesh, Karnataka, Tamil Nadu, Rajasthan and Bihar (a
     combined 56.5% of 2QFY12 adjusted gross revenues as per TRAI data). This is likely to significantly
     raise capex and opex costs for Bharti, as and when it happens.
     Exhibit 19: Circle-wise licence renewal costs – Significant impact
                                                                   Contracted           ‘Excess      Total licence
                                                                                                                      Current value
     Telecom circle                  Licence renewal date           spectrum          spectrum’     renewal costs
                                                                                                                            (Rsmn)
                                                                 costs (Rsmn)     costs (Rsmn)*            (Rsmn)
     Delhi                              29 November 2014                 9,286             9,490            18,776          15,020
     Mumbai                             28 September 2021                6,269             4,720            10,989           5,189
     Kolkata                            29 November 2014                 3,068               857              3,925          3,140
     Maharashtra                        28 September 2021                7,263             6,740            14,003           6,612
     Gujarat                            28 September 2021                9,292                 0              9,292          4,388
     Andhra Pradesh                     12 December 2015                 9,534             7,775            17,309          12,772
     Karnataka                            15 February 2016               8,442             6,227            14,668          10,699
     Tamil Nadu (incl. Chennai)         29 November 2015                11,618             7,669            19,286          14,286
     Kerala                             28 September 2021                4,587                 0              4,587          2,166
     Punjab                             12 December 2015                 4,517             2,889              7,406          5,465
     Haryana                            28 September 2021                  899                 0                899            425
     Uttar Pradesh (West)               28 September 2021                3,727                 0              3,727          1,760
     Uttar Pradesh (East)                 10 February 2024               9,409             3,188            12,597           4,964
     Rajasthan                                22 April 2016              6,574             5,019            11,593           8,263
     Madhya Pradesh                     28 September 2021                5,438             4,580            10,018           4,730
     West Bengal                          11 February 2024               2,777                 0              2,777          1,094
     Himachal Pradesh                   12 December 2015                   579                 0                579            427
     Bihar                                10 February 2024               3,164             2,766              5,931          2,337
     Orissa                               10 February 2024               1,508             1,319              2,827          1,114
     Assam                                    08 July 2024                 645                 0                645            246
     North East                         12 December 2025                   658                 0                658            225
     Jammu & Kashmir                      10 February 2024                 471                 0                471            186
     Total (Rsmn)                                                      109,725            63,239          172,963          105,507
     Per share impact (Rs)                                                                                                      27
     Source: TRAI, Nirmal Bang Institutional Equities Research
     * This is in excess of the ‘prescribed spectrum limit’ (10MHz for Delhi and Mumbai, 8MHz for other circles) over the ‘contracted
     spectrum’ for respective circles

     Exhibit 20: Regulatory risks – Per share impact for Bharti
     Particulars                                                                                   (Rsmn)    Per share impact (Rs)
     Current value of licence renewal costs                                                        105,507                     27
     ‘Excess spectrum’ costs                                                                        33,083                      9
     Total                                                                                         138,590                     36
     Source: TRAI, Nirmal Bang Institutional Equities Research

     Slowdown in net subscriber addition – Reflects rising saturation in Indian market
     Over the past few months, Bharti’s net subscriber addition in India fell significantly and stood at just 0.96mn
     in November 2011, the lowest in nearly six years. This, we believe, is a clear sign that the Indian telecom
     market is nearing saturation point and going forward, net addition will continue to steadily taper down. In
     October 2011, mobile tele-density stood at 72.7% as per TRAI data. Urban tele-density stood at 160%, while
     rural tele-density was 35.8%. Going forward, it is apparent that incremental subscriber addition will consist of
     rural subscribers who typically take time to ramp up their usage. Thus, Bharti needs to grow revenues not
     merely through subscriber addition but also through better pricing, which, as we have elaborated, is not likely
     to be easy given a highly competitive market and the likelihood of some intervention from TRAI in the event
     of sustained tariff hikes. Data revenue growth through 3G services is likely to take time to ramp up given that
     Bharti has not yet gone full throttle on this and is ‘testing the waters’ to see customer response. Non-
     availability of vernacular content is another issue that could hamper greater off-take of 3G services.




31                                                                                                                    Bharti Airtel
                                                                              Institutional Equities
     Exhibit 21: Bharti subscriber addition in India – Reflects saturation
                           (mn)
                           3.5


                           2.9

                                                                                   A steady decline
                           2.3


                           1.7


                           1.1


                           0.5
                                  Nov-10       Jan-11      Mar-11    May-11     Jul-11      Sep-11      Nov-11

     Source: Cellular Operators’ Association of India (COAI)

     African market – A challenging proposition for Bharti
     Bharti earned 24.3% of its gross revenues and 21% of EBITDA in 2QFY12 from African operations. The
     company operates in as many as 17 countries in the African continent and is thus subject to significant
     regulatory as well as currency risks. Commodity prices impact these economies to a great extent and
     consequently their currency movements tend to be volatile, which can clearly be gauged from the forex
     volatility seen in African operations (Refer Exhibit 22). While Bharti has performed impressively in India
     through the ‘minute factory model’, this cannot necessarily be extrapolated to its attempt at repeating its
     success in Africa. The company has a target of achieving US$5bn in revenue and US$2bn in EBITDA by
     FY13E, which, we believe, is fairly ambitious, particularly the EBITDA aspiration – we factor in US$4.66bn
     revenues and US$1.35bn EBITDA in FY13E for the consolidated Africa business.
     Exhibit 22: Forex gains/(losses) in Africa
                            (US$mn)
                            20


                             0


                           (20)


                           (40)


                           (60)


                           (80)
                                      1QFY11      2QFY11        3QFY11    4QFY11         1QFY12       2QFY12

     Source: Company




32                                                                                                               Bharti Airtel
                                                                     Institutional Equities
     Key risks to our call
          Sustained tariff hikes by Bharti despite intense competition not having a major impact on usage, which
          will lead the company to outperform our revenue, margin and EPS estimates
          Stronger-than-expected growth in Africa driving better margins and EPS accretion
          A better-than-expected outcome on the regulatory front, leading to lower payouts and thus lesser current
          value of these payouts as compared with our calculations
          Favourable currency movements (rupee appreciation) leading to benefits owing to a high proportion of
          foreign currency debt on the company’s balance sheet (boosting book value), as well as equipment
          payables (boosting earnings)
          Monetisation of telecom tower business, thus enabling de-leveraging and thus better valuation

     Key assumptions
     Revenue
     We forecast 18.9% CAGR in revenues for Bharti over FY11-13E, at Rs841.3bn in FY13 (Rs594.7bn in
     FY11). We expect mobile services – India and South Asia business to clock 17% revenue CAGR at
     Rs496.2bn in FY13 (Rs362.7bn in FY11), led by an improving ARPU trend (expect 0.3% CAGR in ARPU to
     Rs203/month in FY13 versus Rs202 in FY11), which, we expect, will be boosted by stability in pricing and off-
     take of 3G services. We expect RPM to rise to 45.5 paise in FY13 from 44.5 paise in FY11. On the other
     hand, we expect the consolidated Africa business to post 27.3% CAGR in dollar terms to touch US$4.66bn
     by FY13 (as against the management’s target of US$5bn). We expect this to be driven by improvement in
     MoU per user, which, we expect, will be led by lower tariff. We expect the enterprise business to clock 7.5%
     CAGR, tele-media to post 6.6% CAGR and passive infrastructure services to clock 16% CAGR over the
     period.
     Exhibit 23: Bharti revenue, growth forecasts
                           (Rsmn)                                                             (%)
                          850,000                                                             55

                          760,000                                                             46

                          670,000                                                             37

                          580,000                                                             28

                          490,000                                                             19

                          400,000                                                             10
                                           FY10             FY11     FY12E            FY13E
                                                    Total revenues   Revenue growth (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research

     Margins
     We forecast EBITDA margin to touch 34.6% in FY13 as against 33.6% in FY11. This is likely on the back of
     stability in the pricing environment and some operating leverage. From a segmental perspective, we expect
     mobile services – India and South Asia margin to touch 35% in FY13, consolidated Africa margin to rise to
     29% (23.9% in FY11), tele-media margin to touch 46.5% (45.4% in FY11), enterprise margin to reduce
     slightly to 24% (24.5% in FY11) and passive infrastructure margin to touch 40% (37.1% in FY11). In absolute
     terms, we forecast 20.8% EBITDA CAGR over FY11-13E. It should be noted that our margin estimates
     are below consensus estimates by 182bps in FY13.




33                                                                                                  Bharti Airtel
                                                                     Institutional Equities
     Exhibit 24: Bharti EBITDA, margin forecasts
                           (Rsmn)                                                                 (%)
                          300,000                                                                  45

                          270,000                                                                  42

                          240,000                                                                  39

                          210,000                                                                  36

                          180,000                                                                  33

                          150,000                                                                  30
                                           FY10              FY11     FY12E               FY13E
                                                         EBITDA      EBITDA margins (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research

     Net profit
     We forecast 15.2% CAGR in net profit for Bharti over FY11-13E. However, we expect earnings growth of
     44.2% YoY in FY13 after 7.9% YoY decline in FY12, mainly owing to margin expansion and slower increase
     in interest and amortisation costs. Nonetheless, despite decent earnings growth forecast for FY13, our
     estimate is still well below consensus estimates by 17.7%, as consensus factors in 58% YoY earnings
     growth in FY13, which, we believe, is on the higher side.
     Exhibit 25: Bharti net profit, growth forecasts
                          (Rsmn)                                                                  (%)
                          90,000                                                                  50

                          82,000                                                                  33

                          74,000                                                                  16

                          66,000                                                                  (1)

                          58,000                                                                  (18)

                          50,000                                                                  (35)
                                         FY10              FY11      FY12E              FY13E
                                                        Net profit    Net Profit growth (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research




34                                                                                                       Bharti Airtel
                                                                                                                         Institutional Equities
Financials
Exhibit 26: Income statement                                                                Exhibit 28: Cash flow
Y/E March (Rsmn)                     FY09        FY10        FY11      FY12E      FY13E     Y/E March (Rsmn)                         FY09       FY10       FY11      FY12E      FY13E
Net sales                          369,616     418,472    594,672     717,495    841,283    EBIT                                   104,098    104,801     97,598    111,337    147,747
% growth                              36.8        13.2        42.1       20.7       17.3    (Inc.)/dec. in working capital          (2,473)    12,227      9,577     42,382     42,807
Total expenditure                  217,937     250,839    395,008     473,364    549,985
                                                                                            Cash flow from operations              101,625    117,028    107,175    153,720    190,553
EBITDA                             151,679     167,633    199,664     244,131    291,298
                                                                                            Other income                             1,522        697      1,346      1,481      1,629
% growth                              33.4        10.5        19.1       22.3       19.3
EBITDA margin (%)                     41.0        40.1        33.6       34.0       34.6    Depreciation & amortisation             47,581     62,832    102,066    132,793    143,552
Finance & other income              17,527       4,955       3,448      6,547      7,328    Financial expenses                     (11,613)     (178)    (21,813)   (39,047)   (41,324)
Finance expenses                    27,618       4,436     23,915      44,114     47,023    Tax paid                                (6,615)   (21,961)   (24,388)   (18,428)   (28,079)
Gross profit                       141,588     168,152    179,197     206,564    251,603    Dividends paid                          (4,442)    (4,442)    (4,428)    (6,514)   (11,745)
% growth                              24.1        18.8          6.6      15.3       21.8    Net cash from operations               128,059    153,976    159,958    224,004    254,586
Depn. & Amortisn.                   47,581      62,832    102,066     132,793    143,552    Capital expenditure                   (144,171) (124,314) (277,094) (143,499) (147,225)
Profit before tax                   94,007     105,320     77,131      73,771    108,051
                                                                                            Net cash after capex                   (16,112)    29,662 (117,136)      80,505    107,362
% growth                              22.3        12.0      (26.8)       (4.4)      46.5
                                                                                            Inc./(dec.) in short-term borrowing     45,460    (44,384)    63,946           -          -
Tax                                  6,615      13,453     17,790      18,428     28,079
Effective tax rate (%)                  7.0       12.8        23.1       25.0       26.0    Inc./(dec.) in long-term borrowing     (23,723)    43,211    365,640    (84,370) (112,213)
Profit after tax                    87,392      91,867     59,341      55,342     79,973    Inc./(dec.) in borrowings               21,737     (1,173)   429,586    (84,370) (112,213)
% growth                              27.6          5.1     (35.4)       (6.7)      44.5    (Inc.)/dec. in investments                    -   (13,198) (327,401)           -          -
Exceptional items                    (220)       (181)       (292)           -          -   Equity issue/(buyback)                       3           -          -          -          -
Minority interest                    1,759       1,870     (1,475)      (392)      (392)    Cash from Financial Activities          21,741    (14,371)   102,185    (84,370) (112,213)
Share of associate cos. profits      (713)         (48)        (57)       (57)       (57)   Others                                  (1,261)    (1,113)     (797)      2,997      3,021
Reported net profit                 84,700      89,768     60,467      55,677     80,308
                                                                                            Opening cash                             6,777     11,145     25,323      9,575      8,706
% growth                              26.4          6.0     (32.6)       (7.9)      44.2
                                                                                            Closing cash                            11,145     25,323      9,575      8,706      6,876
EPS (Rs)                              22.3        23.6        15.9       14.7       21.1
                                                                                            Change in cash                           4,368     14,178    (15,748)     (869)     (1,830)
Source: Company, Nirmal Bang Institutional Equities Research
                                                                                            Source: Company, Nirmal Bang Institutional Equities Research
Exhibit 27: Balance sheet
                                                                                            Exhibit 29: Key ratios
Y/E March (Rsmn)                       FY09        FY10       FY11      FY12E     FY13E
Equity capital                        18,982      18,988    18,988    18,988    18,988      Y/E March                                 FY09       FY10       FY11     FY12E      FY13E
Other components of equity            74,299    101,610 111,234 111,234 111,234             Return ratios
Reserves                            210,663     301,342 357,446 406,609 475,172             RoE (%)                                    32.5       24.7       13.3       10.9       14.1
Net worth                           303,945     421,940 487,668 536,831 605,394             RoCE (%)                                   26.2       19.3        9.2        7.7       10.4
Minority interest                     10,704      25,285    28,563    28,171    27,779      Operating ratios
Unearned income - IRU sales            3,330           -         -         -         -      Revenue growth (%)                         36.8       13.2       42.1      20.7       17.3
Non-current liabilities                7,234      33,799    46,650    49,704    52,781      EBITDA margins (%)                         41.0       40.1       33.6      34.0       34.6
Short-term loans                      64,808      20,424    84,370    84,370    84,370      EBITDA growth (%)                          33.4       10.5       19.1      22.3       19.3
Long-term loans                       53,993      81,474 532,338 447,968 335,755            Net Profit growth (%)                      26.4        6.0     (32.6)      (7.9)      44.2
Total loans                         118,800     101,898 616,708 532,338 420,125             Mobile subscriber base (mn)                93.9      127.6     162.2      186.2      205.4
Deferred tax liability                 7,556           -         -         -         -      ARPU (Rs/month)                            325         244       202        193        203
Total liabilities                   451,570     582,922 1,179,589 1,147,044 1,106,079       RPM (Paise)                                63.9       53.2       44.5      43.1       45.5
Acquired intangible assets - net      40,364      59,890 637,317 637,317 637,317            Valuation ratios
Gross block                         549,810     686,136 956,999 1,100,498 1,247,722         PER (x)                                    14.8       14.0       20.8       22.6      15.6
Depreciation                        140,675     203,507 305,573 438,366 581,918             P/BV (x)                                    8.7        7.6        9.3        7.3       5.7
Net block                           409,136     482,629 651,426 662,132 665,804             Price/sales (x)                             3.4        3.0        2.1        1.8       1.5
Investments                           37,925      52,264     6,224     6,224     6,224      EV/EBITDA (x)                               4.1        3.0        2.6        2.3       2.1
Other non-current assets              10,370      18,247    19,183    19,183    19,183      Dividend Payout (%)                         4.5        4.2        7.5       10.0      12.5
Deferred tax asset                         -      12,489    45,061    45,061    45,061      Source: Company, Nirmal Bang Institutional Equities Research;
Debtors                               28,528      35,711    54,929    58,811    62,232      Note: For Bharti, mobile subscriber base and ARPU are only for India
Derivative financial instruments      11,545         144     2,682     2,682     2,682
Pre-paid expenses                     29,957      20,835    30,504    30,504    30,504
Deferred taxes on income               8,810       2,826     5,280     5,280     5,280
Cash & bank balances                  11,145      25,323     9,575     8,706     6,876
Other current assets                  16,169         582     2,883     3,318     3,770
Total current assets                106,153       85,421 105,853 109,301 111,344
Trade & other payables                81,130    102,303 239,684 278,069 316,430
Other current liabilities             71,248      25,715    45,791    54,105    62,425
Total current liabilities           152,377     128,018 285,475 332,174 378,854
Net Current assets                  (46,224)    (42,597) (179,622) (222,873) (267,510)
Total assets                        451,570     582,922 1,179,589 1,147,044 1,106,079
Source: Company, Nirmal Bang Institutional Equities Research



                35                                                                                                                                                    Bharti Airtel
                             Institutional Equities




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36                                          Bharti Airtel
                                                                                                                Institutional Equities


                                          Idea Cellular
                                                                                                                             9 January 2012

                      Reuters: IDEA.BO; Bloomberg: IDEA IN

                      All Positives Priced In                                                                                  SELL
                      We believe Idea Cellular’s stock price outperformance over the past one year is                          Sector: Telecommunications
                      ahead of fundamentals and the street appears to be over-enthused by the tariff
Initiating Coverage




                      hikes effected in July 2011. The hikes were undertaken after years of tariff                             CMP: Rs82
                      reduction; we believe margins are unlikely to rise to the extent factored in by
                      consensus as the hikes are more a reflection of higher costs rather than an                              Target Price: Rs75
                      improvement in pricing power. Apart from this, regulatory risks, notably ‘excess                         Downside: 9%
                      spectrum’ charges and licence renewal knock off Rs29 from our target price. We
                      assign a Sell rating to Idea Cellular with a target price of Rs75. It should be noted
                      that our FY13 EPS estimate is 11.9% below consensus estimates.                                           Harit Shah
                                                                                                                               harit.shah@nirmalbang.com
                      Stock outperformance ahead of fundamentals: Idea Cellular has outperformed the
                      Sensex by as much as 39% over the past one year. The tariff hikes effected by the
                                                                                                                               +91-22-3926 8068
                      company have led to optimism about a considerable improvement in margins and
                      earnings, as reflected in FY13 consensus estimates. However, we believe the tariff                       Key Data
                      hikes are more a reflection of higher costs rather than improved pricing power and                       Current Shares O/S (mn)                                         3,307.4
                      consequently, our margin forecasts are below consensus. We believe the need to build                     Mkt Cap (Rsbn/US$bn)                                         271.5/5.1
                      3G networks to boost penetration in order to recover the huge investments made in 3G
                                                                                                                               52 Wk H / L (Rs)                                                104/52
                      spectrum is likely to keep network operating costs at a higher level, thereby ensuring
                      that margin expansion is unlikely to be achieved to the extent factored in by consensus                  Daily Vol. (3M NSE Avg.)                                     7,423,439
                      forecast. We therefore believe the street’s enthusiasm in respect of tariff hike is
                      overdone and stock price upside owing to this factor is not likely to be significant. Our
                                                                                                                               Share holding (%)                Q4FY11 Q1FY12 Q2FY12
                      FY13 margin estimate is below consensus estimates by 111bps.
                                                                                                                               Promoter                             46.0             46.0           42.2
                      Regulatory risks slash Rs29 from our TP, account for 35% of current market-cap:
                      We believe the current share price does not fully capture regulatory risks, notably                      FII                                  42.8             43.0           42.2
                      ‘excess spectrum’ charges and licence renewal. Idea will have to pay Rs13.3bn for its                    DII                                    7.9             8.0            8.7
                      ‘excess spectrum’ holdings based on the rates recommended by TRAI’s expert                               Corporate                              0.7             0.5            0.8
                      committee, which translates into an impact of Rs4/share. As regards licence renewal, it
                                                                                                                               General Public                         2.6             2.5            2.3
                      will have to pay Rs136bn for renewing its licences over 2015-27 assuming the quantum
                      of spectrum awarded on renewal is capped at the ‘prescribed limit’ (10MHz for Delhi
                      and Mumbai and 8MHz for other circles). The current value of this based on a risk-free                   One Year Indexed Stock Performance
                      rate of 8% amounts to Rs82.7bn (~US$1.57bn), or Rs25/share. Thus, regulatory risks                         150
                      knock off Rs29 from our target price.                                                                      140
                                                                                                                                 130
                      Valuation: We value Idea Cellular based on the SOTP method. We assign an                                   120

                      EV/EBITDA multiple of 5x for its mobility business and EV/tower of Rs4.8mn for its                         110
                                                                                                                                 100
                      tower business. We adjust for regulatory risks faced by the company, which knock off                        90
                                                                                                                                  80
                      Rs29 from our target price. Thus, the implied equity value comes to Rs249.1bn,                              70

                      resulting in a target price of Rs75. This implies 9% downside from the CMP. Therefore,                      60
                                                                                                                                     Jan-11   Mar-11   May-11    Jul-11     Sep-11    Nov-11    Jan-12
                      we assign a Sell rating to Idea Cellular with a target price of Rs75.                                                    IDEA CELLULAR              NSE S&P CNX NIFTY INDEX


                      Y/E Mar (Rsmn)                  FY09          FY10           FY11          FY12E            FY13E
                      Revenue                      101,313        123,979        154,384        195,828          241,467
                      YoY (%)                          50.8          22.4           24.5            26.8            23.3       Price Performance (%)
                      EBITDA                        28,134         33,579         37,258         51,545           64,408                                          1M              6M                1 Yr
                      EBITDA (%)                       27.8          27.1           24.1            26.3            26.7
                                                                                                                               Idea Cellular                    (15.8)               4.6            17.9
                      Adj. PAT                       8,816          9,539          8,987          7,786           12,331
                      YoY (%)                        (15.4)           8.2           (5.8)         (13.4)            58.4       Nifty Index                       (5.6)         (15.5)           (21.4)
                      FDEPS (Rs)                        2.7           2.9             2.7            2.4             3.7       Source: Bloomberg
                      RoE (%)                          10.5           7.7             7.6            6.1             9.0
                      RoCE (%)                          8.2           5.8             5.5            6.3             8.5
                      P/E (x)                          30.6          28.3           30.0            34.6            21.9
                      EV/EBITDA (x)                    10.9          10.0           10.1             7.2             5.6
                      Source: Company, Nirmal Bang Institutional Equities Research


                                                                    Please refer to the disclaimer towards the end of the document.
                                                                                 Institutional Equities
     Initiate coverage with a Sell rating, target price of Rs75
     We value Idea Cellular based on an SOTP method, assigning enterprise value (EV) multiples to the core
     mobility business and tower business. We assign an EV/EBITDA multiple of 5x for the mobility business, a
     9% discount to Bharti Airtel’s multiple given the lower scale and profitability, and EV/tower of Rs4.8mn (book
     value) for the tower business. We also adjust for regulatory risks faced by the company in the form of one-
     time fee on ‘excess spectrum’ and current value of licence renewal costs, which knock off Rs29 from our
     target price. After adjusting for debt, cash and short-term investments, the implied equity value comes to
     Rs249.1bn, resulting in a target price of Rs75. This implies 9% downside from the CMP. Thus, we assign a
     Sell rating to Idea Cellular with a target price of Rs75.
     Exhibit 1: SOTP valuation
                                                           Core mobility business
     EBITDA (Rsmn, FY13E)                                                                                  56,337
     EV/EBITDA multiple (x)                                                                                    5.0
     EV (Rsmn)                                                         (A)                                281,686
                                                               Tower business
     No. of towers (FY13E)                                                                                 31,500
     EV/tower (Rsmn)                                                                                           4.8
     EV (Rsmn)                                                          (B)                               151,200
                                                                      Total
     EV (Rsmn)                                                (C) = (A)+(B)                               432,886
     Cash and short-term investments (Rsmn, FY13E)                        (D)                              19,741
     Total debt (Rsmn, FY13E)                                             (E)                             107,529
     Equity value (Rsmn)                                   (F) = (C)+(D)-(E)                              345,098
     No. of shares (Rsmn)                                                 (G)                               3,303
     Equity value per share (Rs)                                (H) = (F)/(G)                                 104
                                                               Regulatory Risk
     Current value of licence renewal costs (Rsmn)                        (I)                              82,665
     ‘Excess spectrum’ costs (Rsmn)                                      (J)                               13,321
     Total (Rsmn)                                              (K) = (I)+(J)                               95,986
     Regulatory risk per share (Rs)                           (L) = (K)/(G)                                    29
                                                                  Target Price
     Implied equity value (Rsmn)                             (M) = (F)-(K)                                249,112
     Value per share (Rs)                                     (N) = (H)-(L)                                    75
     Source: Nirmal Bang Institutional Equities Research

     Nirmal Bang Institutional Equities Research estimates versus Bloomberg consensus estimates
     We believe current FY13 Bloomberg consensus projections are too optimistic in terms of EBITDA margin as
     well as EPS estimates, even as revenue projections appear realistic. We are slightly ahead of Bloomberg
     consensus estimates on the revenue front by 2-5%. However, while our EBITDA margin estimates are in line
     with consensus as regards FY12 (just 8bps higher), it is lower by 111bps in the case of FY13. Consensus
     EBITDA margin projections likely factor in upside from the recently-effected tariff hikes. However, we believe
     tariff hikes are more a function of the increase in costs for telecom companies rather than any indication of
     improved pricing power and do not believe there is a case for modeling margin expansion owing to this factor
     alone. As regards earnings, despite decent earnings growth forecast for FY13 our estimates are
     below consensus estimates by 11.9%, as consensus is factoring in a stupendous 94% YoY earnings
     growth, which, we believe, is on the higher side. It should be noted that despite decent earnings
     growth forecast in FY13, our RoE estimate for Idea Cellular is still in single digit, at just 9%.




38                                                                                                  Idea Cellular
                                                                                 Institutional Equities
     Exhibit 2: Nirmal Bang Institutional Equities estimates vs. Bloomberg consensus estimates
     Particulars                                  Bloomberg Consensus                       NBIE Research                 % difference
                                                                    FY12E
     Revenues (Rsmn)                                                192,789                        195,828                         1.6
     EBITDA (Rsmn)                                                    50,597                        51,545                        1.9
     EBITDA margin (%)                                                  26.2                          26.3                       8bps
     EPS (Rs)                                                            2.2                            2.4                        7.9
                                                                    FY13E
     Revenues (Rsmn)                                                230,571                        241,467                         4.7
     EBITDA (Rsmn)                                                    64,071                        64,408                        0.5
     EBITDA margin (%)                                                  27.8                          26.7                   (111bps)
     EPS (Rs)                                                            4.2                            3.7                     (11.9)
     Source: Bloomberg, Nirmal Bang Institutional Equities Research

     Investment Concerns
     Stock outperformance ahead of fundamentals
     Idea Cellular has significantly outperformed the Sensex by as much as 39% over the past year, having
     gained 18% versus a 21% decline in the Sensex. The tariff hikes effected by the company in July 2011,
     following in the footsteps of market leader Bharti Airtel, has led to optimism on the street about a
     considerable improvement in margins and earnings, going forward.
     Exhibit 3: Idea Cellular vs Sensex – Strong outperformance
                           (Based to 100)
                           150               Surge on hopes of price hike
                                             improving margins
                           134

                           118

                           102

                            86

                            70
                             6-Jan-11       20-Mar-11       1-Jun-11           13-Aug-11    25-Oct-11         6-Jan-12
                                                    Idea Cellular                   BSE Sensex

     Source: C-line

     However, we believe the tariff hikes need to be put into a proper perspective. Idea hiked tariffs across major
     circles, raising both local and STD tariff by up to 20% depending upon the tariff plan, for both per-second and
     per-minute billing plans and for landlines; for calls to mobiles, the hikes were effected for on-net calls (calls
     made within Idea’s network). The tariff hikes apply to new subscribers, while existing subscribers will move to
     the new tariff structure as and when their existing tariff plan expires. This implies that it would take 2-3
     quarters before the tariff hikes have a noticeable impact.
     As per TRAI data, in the June 2011 quarter (the latest for which data is available), the GSM segment of the
     industry earned 52.8% of its revenues from voice calls. From a traffic perspective, 51.4% of total traffic of the
     GSM segment of the industry was generated from on-net and mobile-to-fixed line local and STD calls. While
     revenue details are not available, we assume the revenue share of these calls to be 10% lower than the
     minutes (traffic) share at 46.2% given lower average tariffs as compared with ILD and off-net STD tariffs.
     While Idea does not divulge details, we assume a similar percentage of traffic generated by the company
     from on-net and mobile-to-fixed line local and STD calls. Thus, we assume 46.2% of Idea’s mobility revenues
     are generated from these calls.
     This implies that based on our assumptions, 24.4% of Idea’s mobility revenues come from on-net and mobile-
     to-fixed line local and STD calls. Given the 20% tariff hike, the positive impact on RPM comes to 4.9%. We
     thus model around 5% improvement in RPM and expect the same to rise to 45.0 paise in FY13 from 42.7
     paise in FY12.

39                                                                                                                       Idea Cellular
                                                                            Institutional Equities
     Exhibit 4: Impact of tariff hikes on mobility RPM
     Particulars                                                                                                               %
     Revenue from voice calls as a percentage of total revenues                      (A)                                     52.8
     Traffic break-up (GSM industry, 1QFY12)
     On-net local calls                                                                                                      42.7
     On-net STD calls                                                                                                         6.1
     Mobile-to-fixed line local calls                                                                                         2.0
     Mobile-to-fixed line STD calls                                                                                           0.6
     Total for GSM segment of the industry                                                                                   51.4
     Revenue break-up @ 10% discount                                                                                         46.2
     % of voice revenues for Idea Cellular                                             (B)                                   46.2
     % of total revenues impacted by tariff hike                              (C) = (A)*(B)                                  24.4
     Tariff hike                                                                        (D)                                  20.0
     Positive impact of tariff hike on RPMs                                   (E) = (C)*(D)                                   4.9
     Source: Company, Telecommunications Regulatory Authority of India (TRAI), Nirmal Bang Institutional Equities Research

     While our FY13 revenue forecasts for Idea are in a narrow range, we are 111bps below consensus
     margins for the company. In our view, a significant rise in costs was the main driver for the tariff hikes,
     rather than any indication of improved pricing power. For example, while Idea brought down the average
     cost per minute (CPM), it has not been able to do so in the same proportion as the fall witnessed in RPM.
     Given the need to expand coverage, network operating costs (NOC) significantly rose as a percentage of
     sales from 11.1% in FY05 to 26% in FY11, even as in absolute terms NOC/minute declined from 19 paise to
     11 paise. Consequently, even as the company managed to keep roaming and access charges (21.1% of
     revenues in FY11 versus 26.6% in FY05), personnel costs (6.9% versus 10.2%), sales and marketing
     expenses (16.9% versus 21%) and administrative costs (5.4% versus 9.1%) under control, the surge in NOC
     neutralised accretion to margins.
     Thus, we are of the view that tariff hikes are more a function of higher costs rather than improved pricing
     power and consequently, our margin forecasts are below consensus estimates. We believe the need to
     build 3G networks to boost penetration in order to recover huge investments made in 3G spectrum
     is likely to keep NOC at higher levels, thus ensuring that margin expansion is unlikely to be achieved
     to the extent factored in by consensus.
     Exhibit 5: Tariff hikes – After consistent RPM declines
                              (Paise/minute)
                             65


                             60


                             55


                             50


                             45


                             40
                                        FY09         FY10            FY11            FY12E           FY13E

     Source: Company




40                                                                                                                   Idea Cellular
                                                                      Institutional Equities
     Exhibit 6: NOC/minute – Falling in absolute terms, but rising as a percentage of RPM
                        (Paise/minute)                                                    (% of RPMs)
                        20                                                                        30

                        18                                                                        26

                        16                                                                        22

                        14                                                                        18

                        12                                                                        14

                        10                                                                        10
                               FY05      FY06       FY07       FY08   FY09     FY10      FY11
                                          Network operating costs      % of RPMs (RHS)

     Source: Company

     Going forward, as we have mentioned in our valuation commentary, our EBITDA margin estimates are below
     consensus by 111bps for FY13. We believe consensus is factoring in margin expansion partly owing to the
     tariff hikes, but as we have mentioned earlier we believe this is more a reflection of significant cost pressures
     than any signs of pricing power, and frequent tariff revisions could also trigger intervention from TRAI.
     Consequently, we believe consensus margin estimates are a bit optimistic.
     Regulatory risk – Licence renewal, ‘excess spectrum’ charges account for 35% of m-cap
     The telecom sector is subject to significant regulatory risks, with policy making on critical issues like
     allocation of spectrum, merger and acquisition and granting of licences decided by DoT. Consequently,
     policies may or may not go in favour of specific companies including Idea. One such example is TRAI’s
     recommendations on the pricing of ‘excess spectrum’ above 6.2MHz (megahertz). TRAI had in February
     2011 come up with its recommendations on pricing of ‘excess spectrum’, based on a report by an expert
     group. Telecom companies holding excess spectrum above the ‘contracted limit’ of 6.2MHz have to pay
     ‘excess spectrum’ charges on a pro-rata basis w.e.f. 1 April 2010 until the end of the licence period in
     respective circles. In the event of licence renewal also, these will be the prices that telecom companies have
     to pay. In November 2011, TRAI in its suggestions to DoT regarding spectrum management and
     licensing framework, reiterated these recommendations.
     TRAI’s expert committee arrived at a price of Rs17.7bn (~US$336mn) per MHz for pan-India contracted
     spectrum up to 6.2MHz and Rs45.7bn (~US$868mn) per MHz for spectrum holding above 6.2MHz. Thus,
     on this basis, Idea will have to pay Rs13.3bn for its ‘excess spectrum’ holding (Refer Exhibit 7). This
     translates into a Rs4/share impact for the company.




41                                                                                                      Idea Cellular
                                                                                 Institutional Equities
     Exhibit 7: Circle-wise break-up of ‘excess spectrum’ charges
     Telecom circle (MHz)                                Idea Cellular (GSM)        Bharti Airtel (GSM)     RCOM (GSM, CDMA)
     Delhi                                                                   8                        10                 4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   2,585                      2,230                      0
     Mumbai                                                                4.4                        9.2                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                        0                     2,714                      0
     Kolkata                                                               4.4                          8                6.2, 5
     ‘Excess spectrum’ charges (Rsmn)                                        0                       201                      0
     Maharashtra                                                           9.8                        8.2                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   3,842                      4,306                      0
     Gujarat                                                               6.2                        6.2            4.4, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Andhra Pradesh                                                          8                        10                 4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   2,235                      4,678                      0
     Karnataka                                                             6.2                        10                 4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                        0                     3,861                      0
     Tamil Nadu (incl. Chennai)                                            4.4                        9.2                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                        0                     3,643                      0
     Kerala                                                                  8                        6.2                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   1,191                           0                     0
     Punjab                                                                7.8                        7.8            4.4, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                     867                        823                      0
     Haryana                                                               6.2                        6.2            4.4, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     UP (West)                                                               8                        6.2                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                   1,296                           0                     0
     UP (East)                                                             6.2                        7.2                4.4, 5
     ‘Excess spectrum’ charges (Rsmn)                                        0                     2,199                      0
     Rajasthan                                                             6.2                        8.2            4.4, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                        0                     1,701                      0
     Madhya Pradesh                                                          8                          8                6.2, 5
     ‘Excess spectrum’ charges (Rsmn)                                   1,305                      2,634                      0
     West Bengal                                                           4.4                        6.2            6.2, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Himachal Pradesh                                                      4.4                        6.2              6.2, 2.5
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Bihar                                                                 4.4                        9.2                  8, 5
     ‘Excess spectrum’ charges (Rsmn)                                        0                     3,181                   788
     Orissa                                                                4.4                          8            6.2, 3.75
     ‘Excess spectrum’ charges (Rsmn)                                        0                       910                      0
     Assam                                                                 4.4                        6.2              6.2, 2.5
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     North East                                                            4.4                        6.2              6.2, 2.5
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Jammu & Kashmir                                                       4.4                        6.2              4.4, 2.5
     ‘Excess spectrum’ charges (Rsmn)                                        0                          0                     0
     Total ‘excess spectrum’ charges (Rsmn)                            13,321                     33,083                   788
     Per share impact (Rs)                                                   4                         9            Negligible
     Source: TRAI, Nirmal Bang Institutional Equities Research

     However, we believe licence renewal is a greater concern for Idea. Given that the licence period is 20 years,
     the telecom major’s licences are up for renewal from 2015-16 onwards. Given the rates recommended by
     TRAI, Idea will have to pay Rs136bn over 2015-27 for renewing its licences assuming that the
     quantum of spectrum awarded on renewal is capped at the ‘prescribed limit’, which is 10MHz for
     Delhi and Mumbai and 8MHz for other circles. We calculate the current value of this based on a risk-
     free rate of 8%, which amounts to Rs82.7bn (~US$1.57bn), or Rs25/share. Thus, regulatory risks
     related to licence renewal and ‘excess spectrum’ charges knock off Rs29 from our SOTP-based target
     price for Idea. Thus, total regulatory risks related to licence renewal and ‘excess spectrum’ charges
     quantified amount to Rs96bn for Idea, or 35% of the company’s market capitalisation.




42                                                                                                                 Idea Cellular
                                                                                 Institutional Equities
     The likelihood of licences getting renewed for a shorter period of time of 10 years is also another negative for
     the company, with spectrum re-farming also negative. This could imply that the telco will have to give up
     capex-efficient 900 MHz spectrum for less capex-efficient 1,800 MHz spectrum in circles like Maharashtra,
     Andhra Pradesh, Madhya Pradesh, Kerala, Gujarat, Punjab and Uttar Pradesh (West), which accounted for a
     combined 74.2% of 2QFY12 adjusted gross revenues.
     Exhibit 8: Circle-wise licence renewal costs – Significant impact
                                                                   Contracted            ‘Excess     Total licence
                                                                    spectrum      spectrum’ costs         renewal     Present value
     Telecom circle                  Licence renewal date        costs (Rsmn)            (Rsmn)*    costs (Rsmn)            (Rsmn)
     Delhi                                05 October 2021                9,286              4,495           13,782            6,508
     Mumbai                              05 December 2026               4,449                  0            4,449              1,413
     Kolkata                               25 January 2028              2,177                  0            2,177                632
     Maharashtra                         12 December 2015               7,263               6,740          14,003            10,332
     Gujarat                             12 December 2015               9,292                   0           9,292             6,856
     Andhra Pradesh                      19 December 2015               9,534               7,775          17,309            12,772
     Karnataka                                09 April 2016             8,442                   0           8,442             6,087
     Tamil Nadu (incl. Chennai)            25 January 2028              8,245                   0           8,245              2,395
     Kerala                              12 December 2015               4,587               4,179           8,766              6,468
     Punjab                                   09 April 2016             4,517               2,889           7,406              5,340
     Haryana                             12 December 2015                 899                   0             899                663
     Uttar Pradesh (West)                12 December 2015               3,727               4,546           8,273              6,104
     Uttar Pradesh (East)                  05 October 2021              9,409                   0           9,409              4,443
     Rajasthan                             05 October 2021              6,574                   0           6,574              3,104
     Madhya Pradesh                      12 December 2015               5,438               4,580          10,018              7,392
     West Bengal                              25 January 2028           1,971                  0            1,971               572
     Himachal Pradesh                         05 October 2021             411                  0              411               194
     Bihar                               06 December 2026               2,246                  0            2,246               713
     Orissa                                25 January 2028              1,071                  0            1,071               311
     Assam                                    25 January 2028             458                  0              458               133
     North East                               25 January 2028             467                  0              467               136
     Jammu & Kashmir                          25 January 2028             334                  0              334                 97
     Total (Rsmn)                                                     100,795              35,205         136,000            82,665
     Per share impact (Rs)                                                                                                        25
     Source: TRAI, Nirmal Bang Institutional Equities Research
     * This is the excess of the ‘prescribed spectrum limit’ (10MHz for Delhi and Mumbai, 8MHz for other circles) over the ‘contracted
     spectrum’ for the respective circles

     Exhibit 9: Regulatory risks – Per share impact for Idea
     Particulars                                                                          (Rsmn)            Per share impact (Rs)
     Current value of licence renewal costs                                                82,665                               25
     ‘Excess spectrum’ costs                                                               13,321                                4
     Total                                                                                 95,986                               29
     Source: TRAI, Nirmal Bang Institutional Equities Research

     Slowdown in net subscriber addition – Reflects rising saturation in Indian market
     After adding 2.7mn new subscribers in March 2011, Idea witnessed four consecutive months of net addition
     decline until July 2011, adding a mere 1mn subscribers in July, the lowest since January 2008. This, we
     believe, is a clear sign that the Indian telecom market is nearing saturation point and going forward, net
     addition will continue to steadily taper down. Even though the company has seen a spike in November 2011
     net addition (2.2mn), we believe this is an aberration. In October 2011, total mobile tele-density as per TRAI
     data stood at 73.3%, with urban tele-density at 160% and rural tele-density at 35.8%. Going forward, it is
     apparent that incremental subscriber addition will consist of rural subscribers who typically take time to ramp
     up usage. Thus, going forward Idea will need to grow revenues through subscriber addition as well as better
     pricing. The latter is not likely to be easy given a competitive market and the likelihood of TRAI intervention in
     the event of sustained tariff hike. Data revenue growth through 3G is likely to take its time to ramp up given
     that these are viewed as ‘premium services’.


43                                                                                                                   Idea Cellular
                                                                                 Institutional Equities
     Exhibit 10: Idea subscriber addition – Reflects saturation, with November likely an aberration
                            (mn)
                           3.0


                           2.5


                           2.0


                           1.5


                           1.0


                           0.5
                                   Nov-10     Jan-11       Mar-11       May-11       Jul-11     Sep-11     Nov-11

     Source: Cellular Operators’ Association of India (COAI)

     Key risks to our call
          Sustained tariff hikes by the company amid intense competition without a major impact on usage will
          lead to the company outperforming our revenue, margin and EPS estimates
          A better-than-expected outcome on the regulatory front, leading to lower payouts and thus lesser current
          value of these payouts as compared with our calculations
          Monetisation of tower business, thus enabling de-leveraging and better valuations

     Key assumptions
     Revenue
     We forecast a 25.1% CAGR in revenue for Idea over FY11-13E, at Rs241.5bn in FY13 (Rs154.4bn in FY11).
     We expect ARPU to register 0.4% CAGR at Rs169/month (Rs167/month in FY11), which, we expect, will be
     boosted by stability in the pricing environment and off-take of 3G services. We expect RPM to post 2.8%
     CAGR at 45 paise in FY13 (42.6 paise in FY11).
     Exhibit 11: Idea revenue, growth forecasts
                            (Rsmn)                                                                           (%)
                           250,000                                                                            30

                           220,000                                                                            28

                           190,000                                                                            26

                           160,000                                                                            24

                           130,000                                                                            22

                           100,000                                                                            20
                                            FY10                FY11              FY12E            FY13E
                                                       Total revenues            Revenue growth (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research




44                                                                                                                  Idea Cellular
                                                                    Institutional Equities
     Margins
     We forecast a steady expansion in EBITDA margin for Idea at 26.7% in FY13 (24.1% in FY11) led by a
     stabilising competitive environment and strong revenue growth. In absolute terms, we forecast a 31.5%
     CAGR in EBITDA over FY11-13E. It should be noted that our margin estimates are below consensus
     estimates by 111bps in FY13.
     Exhibit 12: EBITDA, margin forecasts
                           (Rsmn)                                                                (%)
                          70,000                                                                  30

                          62,000                                                                  28

                          54,000                                                                  26

                          46,000                                                                  24

                          38,000                                                                  22

                          30,000                                                                  20
                                         FY10               FY11     FY12E               FY13E
                                                       EBITDA       EBITDA margins (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research

     Net profit
     We forecast a 17.1% CAGR in net profit of Idea over FY11-13E. However, we expect FY13 to witness 58.4%
     YoY growth in net profit after 13.4% YoY decline in FY12, led by strong revenue growth, improved margins
     and slower growth in interest costs. Nonetheless, despite decent earnings growth forecasts for FY13,
     our estimates are still well below consensus estimates by 11.9%, as consensus is factoring in a
     stupendous 94% YoY earnings growth in FY13, which, we believe, is on the higher side. Despite the
     expected decent earnings growth in FY13, our RoE estimate for Idea is still in single digits, at just 9%.
     Exhibit 13: Idea net profit, growth forecasts
                           (Rsmn)                                                                (%)
                          13,000                                                                 60

                          11,900                                                                 44

                          10,800                                                                 28

                           9,700                                                                 12

                           8,600                                                                 (4)

                           7,500                                                                 (20)
                                         FY10              FY11     FY12E               FY13E
                                                       Net profit   Net Profit growth (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research




45                                                                                                      Idea Cellular
                                                                                                                 Institutional Equities
Financials
Exhibit 14: Income statement                                                        Exhibit 16: Cash flow
Y/E March (Rsmn)               FY09       FY10      FY11        FY12E     FY13E     Y/E March (Rsmn)                        FY09       FY10       FY11      FY12E      FY13E
Net sales                    101,313    123,979   154,384      195,828   241,467    EBIT                                   14,106     13,430     13,285     21,396     29,367
% growth                        50.8       22.4      24.5         26.8      23.3    (Inc.)/dec. in working capital          6,042      7,159     22,401      9,253      5,905
Total expenditure             73,179     90,399   117,126      144,283   177,059    Cash flow from operations              20,148     20,589     35,686     30,650     35,271
EBITDA                        28,134     33,579    37,258       51,545    64,408    Other income                              231      1,328        648           -          -
% growth                        24.9       19.4      11.0         38.3      25.0    Depreciation & amortisation            14,028     20,149     23,973     30,149     35,041
EBITDA margin (%)               27.8       27.1      24.1         26.3      26.7    Financial expenses                     (4,945)    (4,005)    (3,965)   (10,657)   (12,241)
Finance & other income         4,498      4,138     1,843        2,879     3,060    Tax paid                                (576)     (1,214)     (982)     (2,953)    (4,795)
Finance expenses               9,212      6,814     5,160       13,536    15,301    Net cash from operations               28,886     36,848     55,362     47,188     53,276
Gross profit                  23,419     30,903    33,942       40,888    52,167    Capital expenditure                   (78,238)   (55,657)   (97,394)   (41,792)   (40,534)
% growth                        17.6       32.0       9.8         20.5      27.6    Net cash after capex                  (49,352)   (18,810)   (42,032)     5,397     12,743
Depn. & amortisn.             14,028     20,149    23,973       30,149    35,041    Inc./(dec.) in short-term borrowing    (5,073)     5,827      1,251     (4,000)    (3,500)
Profit before tax              9,391     10,754     9,969       10,740    17,126    Inc./(dec.) in long-term borrowing     41,541    (18,856)    40,861     (2,000)    (3,676)
% growth                       (15.8)      14.5      (7.3)         7.7      59.5    Inc./(dec.) in borrowings              36,468    (13,029)    42,112     (6,000)    (7,176)
Tax                              576      1,214       982        2,953     4,795    (Inc.)/dec. in investments            (12,017)     3,148      1,104           -          -
Effective tax rate (%)           6.1       11.3       9.8         27.5      28.0    Equity issue/(Buyback)                 49,874      1,997         34           -          -
Reported net profit            8,816      9,539     8,987        7,786    12,331    Cash from financial activities         74,326     (7,884)    43,250     (6,000)    (7,176)
% growth                       (15.4)       8.2      (5.8)      (13.4)      58.4    Others                                    915     (1,271)       459           -          -

Source: Company, Nirmal Bang Institutional Equities Research                        Opening cash                            4,975     30,864      2,900      4,577      3,974
                                                                                    Closing cash                           30,864      2,900      4,577      3,974      9,541
Exhibit 15: Balance Sheet
                                                                                    Change in cash                         25,889    (27,964)     1,678      (603)      5,567
Y/E March (Rsmn)                FY09      FY10      FY11        FY12E     FY13E
                                                                                    Source: Company, Nirmal Bang Institutional Equities Research
Equity capital                31,001     32,998    33,033       33,033    33,033
Other components of equity   106,916     85,763    86,017       86,017    86,017    Exhibit 17: Key ratios
Reserves                      (5,263)   (5,038)     3,950       11,736    24,067    Y/E March                               FY09       FY10       FY11      FY12E      FY13E
Net worth                    132,653    113,724   122,999      130,786   143,116    Return ratios
Short-term loans               5,305     11,132    12,383        8,383     4,883    RoE (%)                                  10.5         7.7        7.6        6.1        9.0
                                                                                    RoCE (%)                                  8.2         5.8        5.5        6.3        8.5
Long-term loans               83,817     67,461   108,322      106,322   102,646
                                                                                    Operating ratios
Total loans                   89,122     78,593   120,705      114,705   107,529
                                                                                    Revenue growth (%)                        50.8      22.4       24.5        26.8      23.3
Deferred tax liability         1,130      2,142     3,099        3,099     3,099    EBITDA margins (%)                        27.8      27.1       24.1        26.3      26.7
Total liabilities            222,905    194,459   246,804      248,590   253,745    EBITDA growth (%)                         24.9      19.4       11.0        38.3      25.0
Goodwill on consolidation     22,457        61         61          61         61    Net Profit growth (%)                   (15.4)       8.2       (5.8)     (13.4)      58.4
Gross Block                  193,044    254,379   288,126      329,918   370,451    Mobile subscriber base (mn)               38.9      63.8       89.5      110.5      127.3
Depreciation                  59,971     88,907   112,128      139,392   171,549    ARPU (Rs/month)                           252       192         167        161        169
Net block                    133,073    165,472   175,998      190,525   198,902    RPM (Paise)                               64.7      53.9       42.6        42.7      45.0
                                                                                    Valuation ratios
Capital work-in-progress      21,409      5,465    36,467       36,467    36,467
                                                                                    PER (x)                                  30.6       28.3       30.0       34.6       21.9
Intangible assets (net)       12,190     16,206    48,851       45,967    43,082
                                                                                    P/BV (x)                                 10.9       10.0       10.1        7.2        5.6
Investments                   20,452     11,304    10,200       10,200    10,200    Price/sales (x)                           2.7        2.2        1.7        1.4        1.1
Debtors                        3,618      4,656     4,789        6,421     9,236    EV/EBITDA (x)                             2.0        2.4        2.2        2.1        1.9
Cash and bank balances        30,864      2,900     4,577        3,974     9,541
                                                                                    Source: Company, Nirmal Bang Institutional Equities Research
Inventories                      521       536        659         834      1,028
Loans and advances            16,821     25,559    19,756       19,756    19,756
Other current assets           1,861      2,979       776         776        776
Total current assets          53,685     36,630    30,558       31,761    40,338
Current liabilities           38,637     38,447    53,555       61,661    68,734
Provisions                     1,724      2,233     1,777        4,730     6,572
Total current liabilities     40,361     40,680    55,331       66,391    75,306
Net current assets            13,324    (4,050)   (24,773)   (34,630)    (34,968)
Total assets                 222,905    194,459   246,804      248,590   253,745

Source: Company, Nirmal Bang Institutional Equities Research




                    46                                                                                                                                      Idea Cellular
                                                                                                                Institutional Equities


                                          Reliance Communications
                                                                                                                              9 January 2012

                      Reuters: RLCM.BO; Bloomberg: RCOM IN

                      Leverage, low returns on capital to limit upside                                                         HOLD
                      Given Reliance Communications’ (RCOM) worsening operating and financial                                  Sector: Telecommunications
                      metrics over the past several quarters, likely single-digit returns on capital even
Initiating Coverage




                      until FY13, slowdown in incremental subscriber addition, low active subscriber                           CMP: Rs78
                      proportion compared with peers and low 2G revenue coverage of 56.6%, we see
                      little scope for significant appreciation in its share price. Nonetheless, further                       Target Price: Rs86
                      downside may be limited owing to a steep 45% decline over the past one year.                             Upside: 11%
                      We assign a Hold rating to the stock with a target price of Rs86. It should be
                      noted that our FY13 EPS estimate is 12.3% below consensus estimates.
                                                                                                                               Harit Shah
                      High financial leverage; deleveraging depends on tower stake sale: At the end of
                                                                                                                               harit.shah@nirmalbang.com
                      FY11, RCOM’s net debt-equity ratio stood at 0.8x (0.6x in FY10) and net debt-EBITDA
                      ratio at 3.7x (3.2x in FY10). The respective figures at the end of 2QFY12 rose to 0.9x
                                                                                                                               +91-22-3926 8068
                      and 5x, respectively. As much as Rs173.8bn of debt is due for repayment in FY12. A
                      major repayment due is in respect of foreign currency convertible bonds (FCCBs)                          Key Data
                      issued in February 2007. Including interest costs, the outstanding amount is                             Current Shares O/S (mn)                                          2,064.0
                      US$1.15bn (Rs62.1bn at current FX rates). We expect RCOM to borrow Rs60bn to pay                         Mkt Cap (Rsbn/US$bn)                                          160.2/3.0
                      back FCCB holders. Assuming a 10% interest rate for incremental debt, this
                                                                                                                               52 Wk H / L (Rs)                                                 144/61
                      translates into incremental interest costs of Rs3bn for swapping FCCB debt with
                      rupee debt. This has an adverse impact of 21.4% on our FY12 PBT estimate. We                             Daily Vol. (3M NSE Avg.)                                      8,411,767
                      believe the best way for RCOM to deleverage is by selling stake in its tower business,
                      Reliance Infratel. However, given the challenging market and economic conditions, this
                                                                                                                               Share holding (%)                 4QFY11 1QFY12 2QFY12
                      is likely to be a tall order. Funding debt repayment through equity issuance is also likely
                      to be a challenging task under difficult market conditions and a 45% fall in its share                   Promoter                              67.9             67.9        67.9
                      price over the past one year.                                                                            FII                                     9.5             9.7           9.2
                      Single-digit returns on capital likely to continue until FY13: Post-FY09, RoE and                        DII                                     9.8             8.9           9.0
                      RoCE steadily deteriorated, particularly post the tariff wars witnessed after October                    Corporate                               2.0             1.7           2.1
                      2009. RoE and RoCE in FY11 stood at just 3.2% and 3.3%, respectively, which is
                                                                                                                               General Public                        11.6             11.8        11.8
                      considerably below the average cost of capital of over 10%. Even going forward, we
                      expect RoE to be a mere 2.3% in FY12 before recovering to 3% in FY13, while we
                      expect RoCE to decline to 3% in FY12 before moving up slightly to 3.7% in FY13.                          One Year Indexed Stock Performance
                      Therefore, we expect RCOM’s return ratios to remain sub-standard until FY13.                               110

                      Valuation: We assign an EV/EBITDA multiple of 4.5x to RCOM, an 18% discount to                             100

                      Bharti Airtel and arrive at a valuation of Rs28/share, while we value Reliance Infratel at                  90
                                                                                                                                  80
                      a 50% discount to book value given the low third party tenancies, which translates into                     70
                      Rs58/share. Thus, we arrive at a TP of Rs86, implying 11% upside from the current                           60

                      market price. We thus assign a Hold rating to RCOM with a target price of Rs86.                             50
                                                                                                                                  40

                      Y/E Mar (Rsmn)                  FY09          FY10             FY11         FY12E           FY13E              Jan-11   Mar-11   May-11     Jul-11     Sep-11    Nov-11    Jan-12
                                                                                                                                              RELIANCE COMMUNI             NSE S&P CNX NIFTY INDEX
                      Revenue                      229,485        221,323        231,076        206,920          232,391
                      YoY (%)                         20.4           (3.6)            4.4         (10.5)            12.3
                      EBITDA                        93,049         78,205         90,815         66,214           75,527       Price Performance (%)
                      EBITDA (%)                      40.5            35.3           39.3           32.0            32.5
                                                                                                                                                                   1M             6M              1 Yr
                      Adj. PAT                      60,449         46,550         13,456          9,530           12,387
                      YoY (%)                         46.8          (23.0)         (71.1)         (29.2)            30.0       RCOM                                 0.4        (20.3)            (44.5)
                      FDEPS (Rs)                      28.0            21.6            6.2            4.4             5.7       Nifty Index                        (5.6)        (15.5)            (21.4)
                      RoE (%)                         17.0            10.9            3.2            2.3             3.0       Source: Bloomberg
                      RoCE (%)                         8.4             4.8            3.4            3.0             3.7
                      P/E (x)                          2.8             3.6           12.5           17.6            13.6
                      EV/EBITDA (x)                    4.7             5.2            5.5            7.4             5.8
                      Source: Company, Nirmal Bang Institutional Equities Research



                                                                    Please refer to the disclaimer towards the end of the document.
                                                                               Institutional Equities
     We initiate coverage with a Hold rating, target price of Rs86
     We assign an EV/EBITDA multiple of 4.5x to RCOM, which translates into a Rs28/share. This is at an 18%
     discount to the multiple we gave Bharti for its domestic business, given RCOM’s inferior operating
     metrics and quality of subscribers, apart from its own worsening operating performance over the
     past several quarters and single-digit RoE and RoCE likely even until FY13. We value Reliance Infratel
     at a 50% discount to book value of Rs4.8mn/tower given low third-party tenancies, which translates into a
     Rs58 per share value. The slowdown in incremental subscriber addition coupled with the company’s inferior
     quality subscriber base versus peers as reflected by its lower active subscriber proportion and revenue
     market share, as also its low 2G revenue coverage in the circles that it has won 3G spectrum (56.6% vs 71%
     for Bharti and 82.7% for Idea) is likely to lead to its inability to effectively monetise 3G services despite having
     paid heavily for 3G spectrum (Rs85.9bn). We assign a Hold rating to RCOM with a target price of Rs86.
     Nirmal Bang Institutional Equities Research estimates vs Bloomberg consensus estimates
     We are marginally below Bloomberg consensus estimates on the revenue front by 1-2%, while our EBITDA
     margin estimates are 22bps and 55bps lower than consensus estimates for FY12 and FY13, respectively.
     On the EPS front, our FY12 estimates are slightly lower than consensus estimate by 0.5% while our FY13
     estimates are considerably lower by 12.3%.
     Exhibit 1: Nirmal Bang Institutional Equities estimates vs Bloomberg consensus estimates
     Company                                      Bloomberg Consensus                  NBIE Research               Diff.(%)
                                                                  FY12E
     Revenues (Rsmn)                                             211,715                      206,920                 (2.3)
     EBITDA (Rsmn)                                                68,213                       66,214                 (2.9)
     EBITDA margin (%)                                                32.2                        32.0             (22bps)
     EPS (Rs)                                                          4.4                         4.4                (0.5)
                                                                  FY13E
     Revenues (Rsmn)                                             233,733                      232,391                 (0.6)
     EBITDA (Rsmn)                                                77,243                       75,527                 (2.2)
     EBITDA margin (%)                                                33.0                        32.5             (55bps)
     EPS (Rs)                                                          6.5                         5.7               (12.3)
     Source: Bloomberg, Nirmal Bang Institutional Equities Research

     Amortisation of goodwill
     We have considered a conservative scenario wherein if RCOM amortises the goodwill on its balance sheet
     over a period of five years, it would result in a negligible net profit of just Rs36mn in FY12E (down 99.6%),
     while FY13E net profit would fall 76.6% to Rs2.9bn. RoE would decline by 232bps in FY12E while in FY13E it
     would fall 225bps to 0.0% and 0.7%, respectively, whereas RoCE would fall by 120bps and 116bps to 1.8%
     and 2.5%, respectively, for the same period.
     Exhibit 2: Goodwill amortisation impact
     Particulars                                     Pre-goodwill amortisation       Post-goodwill amortisation   Diff. (%)
                                                                  FY12E
     Profit after tax (Rsmn)                                                 9,530                          36       (99.6)
     EPS (Rs)                                                                  4.4                          0.0      (99.6)
     Return on equity (%)                                                      2.3                          0.0   (232bps)
     Return on capital employed (%)                                            3.0                          1.8   (120bps)
                                                                  FY13E
     Profit after tax (Rsmn)                                              12,387                         2,892       (76.6)
     EPS (Rs)                                                                  5.7                          1.3      (76.6)
     Return on equity (%)                                                      3.0                          0.7   (225bps)
     Return on capital employed (%)                                            3.7                          2.5   (116bps)
     Source: Nirmal Bang Institutional Equities Research




48                                                                                                Reliance Communications
                                                                         Institutional Equities
     Investment Concerns
     High financial leverage; deleveraging depends on tower stake sale
     At the end of FY11, RCOM’s net debt-equity ratio stood at 0.8x (0.6x in FY10) and net debt-EBITDA ratio at
     3.7x (3.2x in FY10). The respective figures at the end of 2QFY12 rose to 0.9x and 5x, respectively. Gross
     debt rose to Rs390.7bn from Rs297.2bn in FY10, mainly owing to the payments made in respect of 3G
     spectrum auction, in which RCOM won spectrum in 13 telecom circles and paid Rs85.9bn to the government.
     Moreover, repayment of as much as Rs173.8bn of its debt is due in FY12. Against this, we expect the
     company to register cash flow from operations of Rs35.9bn. Given this scenario, it is apparent that RCOM
     will have to take on additional debt to repay a significant quantum that is due this financial year.
     Exhibit 3: RCOM debt maturity profile – Significant portion due in FY12
     Particulars (Rsmn)                                                             FY11                % of total debt
     Within one year                                                              173,785                         44.5
     Beyond one year                                                              216,928                         55.5
     Total                                                                        390,714                        100.0
     Source: Company

     A major repayment due this financial year is in respect of FCCBs issued in February 2007. The company had
     issued FCCBs worth US$1bn, of which it converted US$10mn into equity and bought back and cancelled
     US$64.7mn of FCCBs. Thus, the quantum of FCCBs outstanding stands at US$925.3mn; including interest
     at 4.95%, the total outstanding amount comes to US$1.15bn. Given the steep rupee depreciation witnessed
     of late, with the currency touching an all-time low of 53.88 against the US dollar on 14 December 2011, the
     total outstanding amount in rupee terms comes to Rs62.1bn at the current FX rate. Thus, over one-third of
     RCOM’s outstanding debt in FY12 relates to FCCBs. It is apparent that there is no way the FCCBs can be
     converted into equity, given that the conversion price is Rs661, a significant 748% premium to the CMP and
     thus the company will have to repay FCCB holders the principal sum along with interest.
     We expect RCOM to take on debt of Rs60bn in order to pay back its FCCB holders the principal along with
     interest. We assume an interest rate of 10% for incremental debt taken, which translates into
     incremental interest costs of Rs3bn for swapping the FCCB debt with rupee debt. Thus, this has an
     adverse impact of 21.4% on our FY12 PBT estimate. Overall, we expect gross interest costs to rise 46.5%
     YoY in FY12. This will be the third consecutive year of net profit decline for RCOM.
     Exhibit 4: Interest costs to exert pressure on earnings in FY12
                             (% growth)
                             50


                             33


                             16


                             (1)


                            (18)


                            (35)
                                             EBIT          Gross interest costs       Net profit

     Source: Nirmal Bang Institutional Equities Research

     We believe the best way for RCOM to deleverage is by selling stake in its tower business, Reliance Infratel.
     However, the company has made several attempts to do the same and on each occasion it was unable to
     successfully conclude the transaction. As per media reports (Mint dated 19 August 2011), a number of
     companies and strategic investors are in talks with RCOM to acquire a stake in Reliance Infratel for a
     valuation of US$5bn, which RCOM is reportedly asking for. However, we believe that given the low third-
     party tenancies at Infratel, such expectations are on the higher side. If RCOM is able to negotiate a 51%
     stake sale in Reliance Infratel at a valuation of US$5bn, a scenario, we believe, is extremely unlikely, its
     net debt-equity ratio will fall to 0.54x and net debt-EBITDA ratio to 3x. We believe funding debt repayment
     through equity issuance is also an extremely challenging task for RCOM, given the lack of conducive market
     conditions as well as the 45% fall in its share price over the past year.

49                                                                                          Reliance Communications
                                                                                 Institutional Equities
     Single-digit RoE, RoCE likely to continue until FY13
     Post-FY09, RCOM’s RoE and RoCE steadily deteriorated, notably after the severe tariff wars witnessed post
     October 2009, which was started mainly by the company itself. RCOM’s RoE and RoCE in FY11 stood at
     just 3.2% and 3.3%, respectively, which is extremely low and considerably below its average cost of capital
     of over 10%. Even going forward, we expect RoE to be mere 2.3% in FY12 before recovering to 3.0%
     in FY13, while we expect RoCE to fall to 3.0% in FY12 before moving up slightly to 3.7% in FY13.
     Thus, we expect RCOM’s return ratios to remain sub-standard even until FY13, well below its
     average cost of capital.
     Exhibit 5: RoE, RoCE – Severe deterioration
                          (%)
                          20

                          16

                          12

                           8

                           4

                           0
                                     FY09             FY10            FY11            FY12E           FY13E
                                                                    RoE             RoCE

     Source: Company, Nirmal Bang Institutional Equities Research

     Poor subscriber quality vs Bharti, Vodafone and Idea – Low active subscriber percentage
     RCOM’s active subscriber base (Visitor Location Register, VLR) as a percentage of its reported subscriber
     base is considerably lower than that of its GSM peers, Bharti Airtel, Vodafone and Idea Cellular. As per TRAI
     data, at the end of September 2011 RCOM had an all-India active subscriber percentage of just 63.5% as
     compared with 88.6% for Bharti, 81.2% for Vodafone and 91.0% for Idea Cellular. This reflects a poor quality
     subscriber base, given that just 63.5% of its reported subscriber base actually generates revenue. A
     comparison with listed peers, Bharti Airtel and Idea Cellular clearly reflects inferior operating metrics in the
     form of considerably lower average revenue per user (ARPU) and minutes of usage (MoU). Even a
     comparison of VLR ARPU shows superior metrics for RCOM’s peers. Apart from this, RCOM’s revenue
     market share in 2QFY12, as per TRAI data, stood at a mere 9%, as compared with 30% for Bharti Airtel, 22%
     for Vodafone and 14% for Idea Cellular. Thus, this reflects a considerably inferior subscriber quality, as
     calculated by dividing the revenue market share by subscriber market share. For RCOM, this subscriber
     quality metric stands at just 0.5x, which is less than half of Bharti Airtel, Vodafone and Idea Cellular. Going
     forward, we believe this inferior subscriber quality is likely to adversely impact the company’s ability to
     effectively monetise 3G services as well, given the higher quality subscriber base of key competitors like
     Bharti Airtel and Vodafone, with whom it faces competition in the key metro circles of Delhi and Mumbai.
     Exhibit 6: Mobile operating metric comparison – Inferior to peers on all counts
     Particulars                                                     RCOM         Bharti Airtel        Vodafone      Idea Cellular
     Mobile subscriber base (in mn, September 2011)                   147.1              172.8            145.0             100.2
     VLR subscriber proportion ( in %, September 2011)                    63.5            88.6             81.2              91.0
     VLR subscriber base (in mn, September 2011)                          93.4           153.1            117.8              91.2
     ARPU (in Rs/month, 2QFY12)                                           101              183                168             155
     VLR ARPU (in Rs/month, 2QFY12)                                       162              206                207             173
     MoU (in minutes/user, 2QFY12)                                        227              423                297            364
     Subscriber market share (in %, September 2011)                       16.8             19.8               16.6           11.5
     VLR subscriber market share (in %, September 2011)                   15.1             24.8               19.1           14.8
     Revenue market share (in %, 2QFY12)                                   9.0             30.0               22.0           14.0
     Quality of subscribers (x, RMS/SMS)                                   0.5              1.5                1.3             1.2
     Source: TRAI, COAI, AUSPI, respective companies, Nirmal Bang Institutional Equities Research




50                                                                                                  Reliance Communications
                                                                               Institutional Equities
     Slowdown in net subscriber addition – Reflects rising saturation level in Indian market
     After adding 3.5mn new subscribers in March 2011, RCOM has witnessed a continuous decline in net
     addition until November 2011, adding mere 1mn subscribers in November, the lowest since April 2007. This,
     we believe, is a clear sign that the Indian telecom market is nearing saturation point and going forward, net
     addition will continue to steadily taper down. In October 2011, as per regulator TRAI, the country’s mobile
     tele-density levels stood at 73.3%. Going forward, incremental subscriber addition will consist of rural users,
     who take time to ramp up usage. Thus, going forward RCOM will need to grow revenues through subscriber
     addition as well as better pricing, with the latter not likely to be an easy proposition. In our view, data
     revenue growth through 3G is likely to take its time to ramp up given that these are viewed as ‘premium
     services’. The company is likely to find it difficult to effectively monetise 3G services given that its 2G
     revenue coverage is just 56.6% in the 13 circles it has won 3G spectrum in. This is much lower than peers
     like Bharti (71%) and Idea (82.7%), which have won 3G spectrum in circles that account for a much more
     substantial share of their respective 2G revenues.
     Exhibit 7: RCOM subscriber addition – Steady decline
                           (mn)
                           4.0


                           3.3

                                                                                 A steady decline
                           2.6


                           1.9


                           1.2


                           0.5
                                  Nov-10     Jan-11      Mar-11       May-11     Jul-11      Sep-11     Nov-11

     Source: Association of Unified Telecom Service Providers of India (AUSPI)

     Key risks
          Sustained tariff hikes despite intense competition that leads the company to outperform our revenue,
          margin and EPS estimates
          Stake sale to a strategic investor providing RCOM with the much-needed cash to reduce leverage and
          consequently improve operating and financial metrics, thereby boosting valuations
          Monetisation of tower business, thus enabling deleveraging and better valuations
          A partnership with Reliance Industries’ (RIL) BWA venture in the form of an agreement for tower
          sharing, which would boost third party tenancies at Reliance Infratel and also valuation

     Key assumptions
     Revenue
     We forecast a flattish 0.3% CAGR in revenues for RCOM over FY11-13E, with revenues in FY13 expected at
     Rs232.4bn (Rs231.1bn in FY11). We expect the company’s Wireless business to post a decent performance
     and clock 13.9% CAGR in revenues over the period at Rs215.2bn (Rs165.8bn in FY11), mainly owing to
     stability in pricing even as subscriber addition slows down. We expect ARPU to touch Rs107 in FY13 as
     compared with Rs116 in FY11. On the RPM front, we expect 1.9% CAGR at 45.9 paise in FY13 (44.2 paise
     in FY11) as the pricing environment stabilises and the effect of the tariff hikes start to reflect. However, we
     expect the Global Enterprise Business unit to register an 11.2% compounded decline in revenues
     over the period to Rs100.1bn (Rs127bn in FY11) owing partly to the one-time impact of the
     accounting policy change in 4QFY11 relating to indefeasible right to use (IRU) sales.




51                                                                                                  Reliance Communications
                                                                        Institutional Equities
     Exhibit 8: Revenue, growth forecasts
                           (Rsmn)                                                                           (%)
                          240,000                                                                          15

                          232,000                                                                          9

                          224,000                                                                          3

                          216,000                                                                          (3)

                          208,000                                                                          (9)

                          200,000                                                                          (15)
                                          FY10               FY11        FY12E             FY13E
                                                      Total revenues      Revenue growth (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research

     Margins
     We expect RCOM’s EBITDA margin to fall 730bps YoY in FY12, partly owing to the fact that EBITDA was
     inflated in FY11 owing to a one-time change in accounting policy related to IRU sales. In FY13, we expect the
     company to post a 50bps improvement in margins as the pricing environment stabilises and RPM improves.
     It should be noted that our FY13 margin estimates are below consensus estimates by 55bps.
     Exhibit 9: RCOM EBITDA, margin forecasts
                             (Rsmn)                                                                   (%)
                             95,000                                                                   40

                             88,000                                                                   38

                             81,000                                                                   36

                             74,000                                                                   34

                             67,000                                                                   32

                             60,000                                                                   30
                                           FY10              FY11        FY12E              FY13E
                                                           EBITDA         EBITDA margins (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research

     Net profit
     We forecast a 4.1% compounded decline in net profit for RCOM over FY11-13E. However, owing to margin
     expansion in FY13, we expect net profit to grow at a decent 30% YoY in that financial year after a 29.2% YoY
     decline likely in FY12 owing to margin contraction and higher interest costs. It should be noted that our
     FY13 EPS estimate is 12.3% below consensus forecasts.
     Exhibit 10: RCOM net profit, growth estimates
                             (Rsmn)                                                                   (%)
                            50,000                                                                    35


                            40,000                                                                    13


                            30,000                                                                    (9)


                            20,000                                                                    (31)


                            10,000                                                                    (53)


                                 0                                                                    (75)
                                           FY10             FY11        FY12E                FY13E
                                                        Net profit     Net Profit growth (RHS)

     Source: Company, Nirmal Bang Institutional Equities Research


52                                                                                               Reliance Communications
                                                                                                                     Institutional Equities
Financials
Exhibit 11: Income statement                                                            Exhibit 13: Cash flow
Y/E March (Rsmn)                 FY09        FY10        FY11      FY12E      FY13E     Y/E March (Rsmn)                         FY09       FY10       FY11      FY12E      FY13E
Net sales                      229,485    221,323     231,076     206,920    232,391    EBIT                                    56,972     40,740     25,777     23,817     29,474
% growth                          20.4        (3.6)         4.4     (10.5)      12.3    (Inc.)/dec. in working capital           9,281      3,465    (52,840)   (16,149)    13,566
Total expenditure              136,435    143,118     140,261     140,706    156,864
                                                                                        Cash flow from operations               66,253     44,205    (27,063)     7,669     43,040
EBITDA                          93,049     78,205      90,815      66,214     75,527
                                                                                        Depreciation & amortisation             36,077     37,465     65,038     42,397     46,053
% growth                          13.3      (16.0)        16.1      (27.1)      14.1
EBITDA margin (%)                 40.5        35.3        39.3        32.0      32.5    Financial expenses                       5,070     11,863    (10,722)   (12,806)   (14,870)
Finance & other income          15,781         932         605      2,083      2,008    Tax paid                                   518     (4,454)     (118)           -     (736)
Finance expenses                12,585     15,519      10,163      14,889     16,879    Dividends paid                          (1,792)    (2,046)    (1,203)    (1,338)    (2,174)
Forex gains/(losses)             1,874     26,450      (1,164)           0          0   Net cash from operations               106,125     87,034     25,932     35,921     71,312
Gross profit                    98,119     90,068      80,093      53,408     60,657    Capital expenditure                   (147,426)   (42,513)   (99,604)   (25,865)   (23,239)
% growth                          13.9        (8.2)     (11.1)      (33.3)      13.6    Net cash after capex                   (41,301)    44,521    (73,672)    10,056     48,073
Depreciation. & amortisation    36,077     37,465      65,038      42,397     46,053
                                                                                        Inc./(dec.) in short-term borrowing    112,906 (159,064)     (95,738)    60,000    (13,682)
ESOP amortisation                    75           -        (67)       (67)       (67)
                                                                                        Inc./(dec.) in long-term borrowing     (48,618)    64,596    189,298    (96,965)   (18,673)
Profit before tax               61,967     52,603      15,122      11,078     14,671
% growth                            7.0     (15.1)      (71.3)      (26.7)      32.4    Inc./(dec.) in borrowings               64,288    (94,468)    93,560    (36,965)   (32,355)
Tax                              (518)      4,454          118           0       736    (Inc.)/dec. in investments             (13,961)    41,558     21,351           -          -
Effective tax rate (%)            (0.8)         8.5         0.8        0.0        5.0   Cash from financial activities          50,327    (52,910)   114,911    (36,965)   (32,355)
Minority interest                2,052      1,193        1,503      1,503      1,503    Others                                    (979)     (255)      (761)        121        121
Share of associate cos.            (16)         32           99         99         99   Opening cash                             8,782     16,829      8,185     48,663     21,876
Extraordinary items                   0      (375)           54         54         54   Closing cash                            16,829      8,185     48,663     21,876     37,715
Reported net profit             60,449     46,550      13,456       9,530     12,387
                                                                                        Change in cash                           8,047     (8,644)    40,478    (26,788)    15,840
% growth                          11.9      (23.0)      (71.1)      (29.2)      30.0
EPS (Rs)                          28.0        21.6          6.2        4.4        5.7   Source: Company, Nirmal Bang Institutional Equities Research
% growth                          46.8      (23.0)      (71.1)      (29.2)      30.0
                                                                                        Exhibit 14: Key ratios
Source: Company, Nirmal Bang Institutional Equities Research
                                                                                        Y/E March                                FY09       FY10       FY11      FY12E      FY13E
Exhibit 12: Balance Sheet                                                               Return ratios
Y/E March (Rsmn)                  FY09       FY10        FY11      FY12E      FY13E     RoE (%)                                   17.0       10.9         3.2        2.3        3.0
Equity capital                  10,320     10,320      10,320      10,320     10,320    RoCE (%)                                    8.4        4.8        3.4        3.0        3.7
Reserves                       412,483    423,286     394,672     402,864    413,077    Operating ratios
Net worth                      422,803    433,606     404,992     413,184    423,397    Revenue growth (%)                        20.4       (3.6)        4.4     (10.5)      12.3
Short-term loans               361,623    202,559     106,821     166,821    153,138    EBITDA margins (%)                        40.5       35.3       39.3       32.0       32.5
Long-term loans                 30,000     94,596     283,893     186,928    168,256    EBITDA growth (%)                         13.3      (16.0)      16.1      (27.1)      14.1
Total loans                    391,623    297,154     390,714     353,749    321,394    Net Profit growth (%)                     11.9      (23.0)     (71.1)     (29.2)      30.0
Minority interest                6,549      6,584       8,245       9,846     11,448    Mobile subscriber base (mn)               72.7      102.4      135.7      158.5      175.3
Deferred tax liability             281        991       3,668       3,668      3,668    ARPU (Rs/month)                            244        158        116        106        107
Total liabilities              821,256    738,335     807,618     780,447    759,907    RPM (Paise)                               62.8       47.5       44.2       44.2       45.9
Goodwill on consolidation       52,215     49,976      47,473      47,473     47,473    Valuation ratios
Gross block                    755,101    786,653     820,902     846,767    870,006    PER (x)                                     2.8        3.6      12.5       17.6       13.6
Depreciation                   141,144    190,671     273,406     315,803    361,856    P/BV (x)                                    4.7        5.2        5.5        7.4        5.8
Net block                      613,957    595,982     547,496     530,964    508,151    Price/sales (x)                             0.7        0.7        0.7        0.8        0.7
Capital work-in-progress       113,096    116,557     181,912     181,912    181,912    EV/EBITDA (x)                               0.4        0.4        0.4        0.4        0.4
Investments                     95,657     41,599       5,698       5,698      5,698    Dividend Payout (%)                         2.7        3.8        7.7      12.0       15.0
Debtors                         39,618     33,117      39,840      42,518     50,935    Source: Company, Nirmal Bang Institutional Equities Research
Cash and bank balances          16,829      8,185      48,663      21,876     37,715
Inventories                      5,427      5,446       5,172       5,669      7,640
Loans and advances              67,557     54,098      50,863      50,863     50,863
Other current assets            17,714     20,726      20,110      20,110     20,110
Total current assets           147,145    121,573     164,648     141,035    167,263
Current liabilities            159,718    147,085     106,018      96,166    114,356
Provisions                      41,096     40,267      33,591      30,469     36,233
Total current liabilities      200,814    187,351     139,608     126,635    150,589
Net current assets             (53,669)   (65,778)     25,039      14,400     16,674
Total assets                   821,256    738,335     807,618     780,447    759,907

Source: Company, Nirmal Bang Institutional Equities Research



                    53                                                                                                                     Reliance Communications
                                                                                                               Institutional Equities
Disclaimer
Stock Ratings Absolute Returns

BUY > 15%

HOLD 0-15%

SELL < 0%

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                 54                                                                                                                    Reliance Communications

				
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